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AUDNZD breakout trade idea on Hawkish RBA

The Antipodean currencies generally move together on a risk basis compared to say the yen or Swiss franc. However, the Australian dollar is the leader as the Australian economy is larger than New Zealand’s. Today’s breakout to the upside is significant as traders are signalling, they are expecting the RBA to turn very hawkish over the coming weeks.

Forex Analysis – AUDNZD

After the release of Australia's stronger than expected employment report, the Australian dollar strengthened overnight. For the first time since July last year, the AUD/NZD rate briefly rose above the 1.0700-level and found sellers at the supply zone printed on the 12th of July 2021. the next significant upside target would be the swing high at 1.0800 which was printed in June 2021, but which had been resistant since the level broke in April 2021.

Currently, the Reserve Bank of Australia (RBA) is expected to decide to bring an immediate end to their QE programme at their next policy meeting on 1st February if labour market conditions continue to tighten. According to today's report, Australian unemployment rates fell further than was expected in December from 4.6% in November to 4.16% last month.

The unemployment rate is now nearing the pre-Global Financial Crisis low of just below 4.0%. This has fully reversed the initial negative COVID shock impact from early 2020 where it briefly peaked at just below 7.5%. The RBA will have been further encouraged by hours worked increasing by 1.0% Month-on-Month in December while employment increased by 0.5%. Hours worked have now risen back above pre-COVID levels from Q1 2020.

The RBA is under pressure to scale back emergency policy settings due to the strength of the Australian labour market. In the coming months, market participants will also pay attention to any hawkish signals from the RBA that they will be bringing forward rate hike plans. In the Autumn of 2021, the rising COVID-19 infections that swept Australia put a hold on the removal of emergency asset purchase tapering. In the current plan, rate hikes are unlikely before next year. If the RBA does go ahead with a rate hike cycle, they are expected to rise by a full 100bps over the course of the cycle and be one of the most aggressively hawkish central banks in the G10.

The sentiment consensus within the traders on the ActivTrader platform is that the AUDNZD will drop, as 66% of them are shorting right now. I fully expect these traders to get squeezed out of their short positions but before they do, I would like to see the Daily breakout level be tested for support.

If we do get a classic retest of that level the risk can be controlled with a stop loss under the most recent swing low on the m30 chart or the 1.06100 price level. For a risk to reward ratio of 1:2 the initial Take Profit target then sits at 1.07253. But for those trend followers who like what they saw on the Daily time frame, the risk to reward becomes a very asymmetrical trade as the upside to 1.080 is a 1:4 RRR.

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