A big question mark for FX traders who enjoy trading the AUDUSD, has been how to treat from a charting sense, the extreme move caused by the flash crash that ripped through the AUDUSD (and USDJPY) in the very first week of 2019. Flash crash type moves have become more common in FX markets over the last 5 years. Examples include the moves that occurred in USDCHF and the NZDUSD in 2015, and GBPUSD in 2016. After most recent flash crash’s, including the examples mentioned, a reversal has occurred from extremes.
This may lead to the assumption that a reversal is going to develop after every flash crash. Unfortunately, there is not a large enough sample size to present a convincing case to seal this argument. The other issue that comes from flash crash incidents is, it takes time for ranges to normalise, before a trader can identify and then become comfortable using the new support and resistance levels to frame new trades with acceptable risk reward parameters.
As to whether the AUDUSD put in place a medium-term low in early January, we suspect that it did, however we do note that prior to the flash crash move, AUDUSD and other AUD cross rates, including AUDNZD were in well-established downtrends beforehand. Therefore, breaks and closes above resistance at .7235/70 in the AUDUSD and 1.0670ish in AUDNZD are required to confirm medium term lows are in place at the flash crash extremes. Until then, the jury is out.
Turning to the NZDUSD, which thankfully has no such charting issues, and which experienced a strong bounce this morning following the release of 4Q CPI data which came in slightly stronger than expected. The year on year CPI rate rising +1.9% (expected +1.8%) while the month on month number CPI increased by 0.1% (expected 0%). A closer look at the details of the report revealed a hawkish slant to the data, as non-tradables inflation rose by 0.7%. A rise which is indicative of rising wages and capacity pressure in the NZ economy and well above the RBNZ’s own forecast of 0.4%.
The post CPI bounce in the NZDUSD has come despite the most recent and pre the U.S. Government shut down, positioning reports showing that the market is now net long the NZDUSD. A significant reversal from the extreme short NZDUSD position, the market held just 4 months ago, in October 2018.
From a technical perspective the short NZDUSD position in October was unwound following the NZDUSD completing a 5-wave rally from the .6424 low to the December .6970 high. The 5-wave rally, an initial indication that the trend in the NZDUSD is higher. Further supporting this idea, the pullback to the .6585 January low occurred in a very corrective, orderly manner. As such, in the short term, I am a buyer of dips in the NZDUSD towards .6755 with stops placed below .6700c and looking for a new impulsive 5 wave move higher to commence, targeting a retest of .6850 before .6950.
Source Tradingview. The figures stated are as of the 23rd of January 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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