AUD/USD, NZD/USD: Binary bets on risk appetite ahead of key market events

• AUD/USD, NZD/USD dance to the tune of broader risk appetite
• Interest rate differentials aren’t overly influencing moves
• Fed, Microsoft earnings to set the tone for risk appetite this week
• Longs favoured over shorts after recent risk rout

Long trades a bet on risk revival

The antipodean currencies, the Australian and New Zealand dollar’s, are binary bets on how broader investor risk appetite evolves this week. Having plunged over the past fortnight before bouncing off horizontal support, setups are in place to look for a reversal. We just need risk assets to oblige to send AUD/USD and NZD/USD higher.

Fed, Microsoft earnings to set the tone

There is no shortage of risk events for traders to navigate this week. Rate decisions from the Fed, BOJ and BoE, US nonfarm payrolls, inflation reads from Australia and Euro area and earnings results from four of the largest companies in the world. To discuss the risks surrounding each would take an eternity, with no guarantee the insight will be correct.

While no two scenarios are identical, my experience of periods laden with risk events is that the tone is usually set early, and fits with prevailing sentiment towards the largest risk event. In this instance, that’s the Fed who are likely to flag a rate cut in September. While five cuts are priced until the middle of next year, if the experience of late last year is any guide, markets may add to rate cut bets should the Fed signal easier policy settings are on the horizon. That should be a risk positive if economic indicators hold up. 

You also can’t escape how influential US tech earnings will be given their performance often spills over to other risker asset classes, including currencies such as the Aussie and Kiwi. Microsoft kicks things off after market close on Wall Street on Tuesday before Meta, Amazon and Apple later in the week.

With positioning a lighter in these names after the recent rout, the bar is arguably slightly lower than earlier this month. Should Microsoft renew confidence that significant outlays to build AI infrastructure will fuel revenue growth, there’s every chance it will flow through to other names in the sector.

Microsoft’s report comes across as key event to unlock optimism regarding the Fed’s later in the week, making the next 24 hours important for risk appetite. Not dismissing the other risk events which can and will move individual markets, but they are the biggest of the big.

AUD/USD, NZD/USD correlation analysis

To explain why AUD/USD and NZD/USD come across as binary bets on risk appetite, I’ve looked at the rolling daily correlation with both over the past month with two-year yield spreads with the United States, the S&P 500 volatility index (VIX) in grey, USD/JPY in black, Nasdaq 100 futures in yellow and copper futures in green.

Here’s the AUD/USD scorecard…

…and for NZD/USD

Rather than yield differentials, the strongest relationships have been with riskier asset classes, underlining why tech earnings and Fed are so important for the Aussie and Kiwi this week.

AUD/USD finding dip buyers

Looking at AUD/USD on the daily, a few things stand out. The first is the Aussie has been battered since the middle of July, hit hard by the rout in riskier asset classes and renewed Chinese economic concerns. The second is that it has shown signs of stabilisation in recent days, attracting bids on dips below .65291, the 61.8% Fib retracement of the April low-July high. The third is bearish momentum looks to be turning, with RSI breaking its downtrend. The caveat is that MACD is yet to confirm the signal.

Having fallen so sharply and with obvious signs of dip-buyers lurking, adopting a long stance screens as a far stronger setup from a risk-reward perspective than going short after the move already seen.

Those contemplating making a bet on a revival in risk appetite could consider buying above the 61.8% Fib retracement with a stop below for protection. To make the trade work, AUD/USD would need to overcome .6580 and 200-day moving averages first, allowing for a retest of .6632 and 50-day moving average. They are your two potential trade targets.

Should the trade move in your favour, consider lifting your stop to entry level, or use a trailing stop, to protect against sudden reversal. If unable to break through .6580 and 200DMA initially, consider squaring the position in search of a better setup.

Also keep a close eye on Australia’s Q2 inflation report that will be released at 11.30am AEST on Wednesday. It will create volatility, especially if we see another upside surprise that will increase the risk of the RBA hiking interest rates next week.

NZD/USD oversold and respectful

NZD/USD screens as an arguably better setup, oversold but still able to bounce off .59593 at the first time of testing, an important level that has provided support in the past. While no guarantee this time will be the same, when RSI has sat at these kinds of levels over the past few years, it has often coincided with a market bottom.

Those taking on the long trade could buy above .58593 with a stop below for protection. Some selling may be encountered at .5900 but there isn’t any real visible resistance levels evident  until we get back towards .5985 or .60491.

-- Written by David Scutt

Follow David on Twitter @scutty