The next commodity Fx pair that we will look at is NZDUSD as part of our series on the characteristics of price action of the major Forex pairs.Characteristics of NZDUSD
The closest cousin of the AUDUSD pair, NZDUSD is highly correlated with AUDUSD. Its trading characteristics and the behavior of price action on NZDUSD are therefore very similar to the ones seen on the charts of AUDUSD. The price generally moves in orderly steps especially on the larger timeframes such as 4-hour, daily and higher, although fake breakouts can occur from time to time.
NZDUSD most of the time trades in a swingy fashion. That is the price tends to move in swings which is probably what makes the pair very well suited for swing trading . The quite often and frequent formation of trendlines and channels further strengthens the swing trading characteristics of the NZDUSD major pair, but also of other NZD pairs too.
This means that like AUDUSD, NZDUSD also retraces much of the moves, either up or down. Trendlines hold generally well. When a trendline that has held for a while is broken it’s a solid signal that the trend has reversed. Horizontal support and resistance also work well but are also overshot by the price sometimes (meaning the price can first push through them before reversing later). Fibonacci retracements and extensions ratios and patterns based on the Fibonacci levels such as the Harmonic patterns also tend to work very well on NZDUSD.Trading conditions:
Long trade entry:
- Look to catch the bullish swings at either good support areas or on breakouts above clear resistance levels (either trendlines, channels or ranges). Trendline support also works very well for joining bullish swings and bullish trends so traders should seek to take advantage of this when trading the NZDUSD pair.
- Look to place the stops below the key distinct support zones after joining a trade. If a clear-cut support is broken (such as a rising trendline) then the long trade will most likely not work anymore as the trend would have probably reversed at this point.
- Target resistance areas to the upside as well as Fibonacci extensions/retracements. Taking some profits when a resistance or Fibonacci area is reached is generally a good strategy when trading NZDUSD since the pair retraces the moves frequently.
Short trade entry:
- Look to sell rallies (retracements) during downtrends and downswings. This can be done either at falling trendlines or key classical resistance and Fibonacci resistance zones.
- Placing stops above key resistance zones works well. Once NZDUSD breaks a rising or falling trendline it will usually continue to travel in the new direction for a while before pausing. Thus, selling at resistance and placing the stops behind the resistance can offer great risk-reward trades.
- Target support zones and Fibonacci extensions/retracements to the downside. Most of the time support will be at least respected temporarily before being broken.
- Many that hold true on AUDUSD are also true for NZDUSD. In this regard, due to the close correlation with AUDUSD, very often NZDUSD can rise or fall in tandem with AUDUSD without any NZD specific news and vice versa.
- NZDUSD like the other commodity currencies (AUD and CAD) is affected by commodity prices, but in the NZD case, the main commodities that affect it are dairy and milk prices. The GDT Price Index which is released twice per month is the most watched economic data when it comes to the Kiwi currency. However, due to its correlation with the other commodity currencies, NZD can also trade on general commodity trends and trends in commodity currencies. So, staying generally updated with movements in commodity markets is also important when trading the NZD currency and the NZDUSD pair.
- Also similar to AUDUSD. NZDUSD can also be sensitive to economic data released from New Zealand during the Asian overnight session. Dry liquidity during the Asia-Pacific trading session combined with big misses in economic data can cause large price spikes on the chats of NZDUSD. Due to the close connection between the Australian and the New Zealand economy, the NZ Dollar also reacts to economic data released from Australia. But again, like in the case of AUDUSD, price spikes during the Asian session are often fully reversed and by themselves can often mislead traders in the wrong direction.
- The pair very often trends but the pace and slope of the price action is gradual. Like AUDUSD, most of the moves within the trend are retraced partially – offering nice trading opportunities to join the trend. Trendlines and channels are highly reliable technical tools to use for this on the NZDUSD currency pair as we discussed earlier.