A Brief Guide to Trading the AUD/NZD Currency Pair

A Brief Guide to Trading the AUD/NZD Currency Pair

Reading time: 8 minutes

Functioning as a cross-currency pair, or simply one of the crosses, the AUD/NZD pairing combines the Australian dollar and the New Zealand dollar. A cross is unlike a major or exotic currency pair as it does not include the US dollar as a base currency (the first listed currency of a quotation) or a quote currency (the second listed currency of a quotation). The AUD/NZD is a popular currency pair in the foreign exchange market (Forex market), and there are seldom issues concerning liquidity (meaning it is rarely a problem to enter and exit at the desired price).

Both currencies are considered commodity-linked currencies and are widely traded in the Asian trading session. Additionally, in view of their geographical position, the AUD and NZD are heavily influenced by the economic performance in China, given it is their largest trading partner. Both economies heavily rely on commodity exports, such as iron ore, coal, and agricultural products. As a result, the AUD/NZD currency pair is sensitive to changes in global commodity prices. 

Fundamental Analysis and Technical Analysis

You will find most traders and investors combine technical analysis and fundamental analysis to base their trading decisions. Even the most devout technical analyst will be aware of the macroeconomic risk events on the calendar that could affect their trading operations. 

How one chooses to navigate the AUD/NZD and determine trading decisions is trader-dependent. This can be a lengthy process. This is why it is often recommended to begin with a demo trading account, permitting one to back-test (and forward-test) their trading ideas before trading with a live account. Additionally, the trader/investor can familiarise themselves with the trading platform’s features. 

Macroeconomic Factors:

The macroeconomic picture helps understand the overall health of the economy through broad economic indicators that can affect the supply and demand of a currency. 

Some of the most important macroeconomic factors for AUD/NZD include:

• Monetary Policy:

The Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) set interest rates in their respective countries. Differences in interest rates between the two countries can also affect the AUD/NZD currency pair, highlighting potential trend changes and possible trading opportunities.

• Growth (GDP):

Gross Domestic Product (GDP) is among the most important macroeconomic indicators. Although imperfect, this measure delivers a single value that defines the total dollar value of finished goods and services over a given period, usually a quarter or year. An economy with increasing GDP bodes well for lower unemployment and can eventually trigger inflationary pressures (thus decreasing purchasing power for the country’s citizens). By and of itself, this can lead to the central bank increasing rates to slow spending growth, which can ultimately bolster a country’s currency.

• Inflation:

Inflation data inform market participants about the overall price level in an economy: the rate at which the prices of goods and services are rising (or falling). Rising consumer prices (usually found through the consumer price index [CPI]) reduce purchasing power and can see a country’s central bank increase interest rates, boosting the country’s currency. 

• Employment:

The employment data provides traders and investors insight into the health of the jobs market, including employment change, the unemployment rate and wage growth. Low unemployment is usually a good sign, with GDP rising. There is a distinct inverse correlation between these two measures. 

Technical Studies:

Technical analysis studies historical price and volume data to help identify trends. Technical analysts (sometimes referred to as chartists) also look for chart patterns to not only recognise trending markets but to help isolate potential turning points. 

Some of the most common technical tools used to trade AUD/NZD include:

• Moving Averages: 

Moving averages average closing prices and filter price action to help determine underlying trends. Therefore, although moving averages can deliver dynamic support and resistance, they are regularly used as a trend-following indicator to identify the overall direction.

• Support and Resistance: 

Support and resistance levels (normally represented as zones) are price areas on a chart where the market tends to pause or reverse direction. While the application of support and resistance levels can be subjective, there are a number of objective ways of applying support and resistance levels to a price chart, such as round numbers, daily high and close levels and pivot points. 

• Technical Indicators: 

There are 100s of technical indicators available to choose from. Some of the most popular measure momentum—help measure the market’s rate of change—such as the Relative Strength Index (RSI) and the Stochastics oscillator, along with trend-based indicators like the Average Directional Index (ADX), the Parabolic SAR indicator and the Moving Average Convergence Divergence (MACD).  

• Candlestick Patterns: 

Japanese candlestick patterns are formations that can provide clues about the direction of future price movements. Popular candlestick patterns include the hammer and shooting star configurations, together with bullish and bearish engulfing patterns. 

Conclusion

Although not included in the main body of the article, while understanding the technical and fundamental components of the currency pair is essential, employing a sound risk-management strategy and having a thorough understanding of trading psychology is equally important. For more on risk management and trading psychology, check out this article and also this one.