NZD/USD Correction Has Come To An End - Upwards From Here

Friday, 22 October 2010

The NZD/USD currency pair was trading as high as 0.7600 last week - after suffering a large set back to 0.7450 (latest print) as a result of many comments from a vast array of officials stating that the currency is hugely overvalued.

As at the time of writing, it is clear that the NZD/USD is in a corrective mode - and nothing more. Investors are sure to realize that the huge disparity between US and New Zealand fundamentals and even technical's are woefully sided with the NZD appreciation from here.

So - how are we playing the apparent correction in this currency? We've decided that whilst we do want to enter in to a "buy" trade from these levels - the current state of the market is just far too risky to put any large amount of money at risk. Therefore, what we have decided to do instead is to put a small trade in right now, backed up by larger quantities down the track if indeed the currency pair does move in our desired direction.

Therefore, at 0.7450 - we have placed a buy order for the NZD/USD currency pair - with a stop loss order positioned for the entire entry order at 0.7390. This gives us enough room to move just in case the currency moves unnecessarily downwards from here.

Our stop will stay at this level until the currency pair reaches the 0.7500 level - and then we will pare the stop loss order back to break even so that we are guaranteed to lose nothing if the currency pair reverses all of a sudden.

As far as the target for this trade is concerned, we think that the reasonable level to expect from such a trade (where there isn't already upwards momentum) - is a level of 100 pips or more.

Therefore, we have placed a limit order where we will take profit on the trade at 0.7550. Obviously, if you are trading on a risk adjusted basis - you might want to wait until potentially 0.7600 for the limit order to kick in. We will of course leave this to you.

Taking a step back and looking at the wider picture in this currency, we see that the major level of support comes in at 0.7215, and major resistance is the medium term top in place at 0.7645. Both of these levels are significant - and we believe that at this stage if the currency pair was to come up against one of the levels, it would fail and crawl in the opposite direction. This remains the case until the technicals or fundamentals of the currency pair's change.