AUD / NZD rally faces technical threat as lunar New Year closes APAC markets

Wall Street, Volatility, AUD / NZD, Lunar New Year– Talking Points

  • US stock indices ended higher last week as volatility hit a low level before the pandemic
  • Lunar New Year holidays see the majority of Asian markets still closed, lighter volumes?
  • AUD / NZD‘s rally may soon find significant resistance with a bearish SMA cross on the cards

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US equities moved higher last week as investors continued to focus on the global economic recovery, strengthened by increased rollouts of Covid vaccination, loose monetary conditions and ongoing fiscal support. The Russell 2000 small cap index provided the most impressive view of the largest with a weekly gain of 2.51%. A more notable development, however, is the collapse in volatility seen in the US markets, reflected by the CBOE S&P 500 Volatility Index (VIX) closes below 20, the lowest level since February 2020.

The collapse of volatility via VIX – which is widely used as a “fear meter”- follows a strong corporate earnings season. So far, financial results from S&P 500 companies have largely beaten analysts’ expectations. Next week, a new round of quarterly results will cross the lines, with commercial juggernaut Walmart scheduled to release its numbers on Thursday. Even with optimistic earnings, some investors are still blowing the horn over stretched valuations.

Equities may have more fuel to continue to run higher despite high valuations amid ongoing support from central banks, particularly the Federal Reserve. In a speech to The Economic Club of New York last week, Fed Chairman Jerome Powell once again assured investors that supportive conditions have come to stay for the time being. Long-term government bond yields ended the week higher with the 30-year yield rising above 2.0%, the highest mark since the beginning of 2020.

S&P 500 vs 30-year government return

S&P 500 vs treasury 30-year-old

Data source: BBG

Monday’s Asia-Pacific Outlook

Monday along with the entire coming week is likely to be quiet throughout the APAC region. Stock exchanges are closed in China, Hong Kong, Singapore and South Korea as traders and investors celebrate the lunar New Year holiday. Currency volumes may also see less activity, which may also translate into lower volatility across many currency pairs. That said, headlines that can drive markets are rapidly breaking down to be more volatile due to reduced levels of liquidity.

Therefore, this week’s financial event calendar is also lighter than usual, but at the end of the week it may happen that New Zealand dollar responds to BusinessNZ’s Performance of Services Index (PSI) report, which is ready to cross the lines early Monday morning, according to DailyFX financial calendar. Japan will also release Q4 GDP data, with analysts expecting an increase of 9.5% year-on-year, down from 22.9% in the previous quarter.

AUD / NZD technical outlook

Despite the holiday season and light financial data being printed for the coming week, AUD/ NZD presents an interesting technical setup that can provide space for action movement. The 23.6% Fibonacci retracement from the Dec-Jan move appears to have interrupted last week’s rally. However, the immediate path higher seems ready for further upward.

The upward, however, may soon find considerable resistance. 20- and 50-day Simple moving averages appears to be on course to complete a bearish cross this week, which could dampen the AUD sentiment and prevent further gains. In addition, a trend line from the August fluctuation also constitutes a test for bulls. Admittedly, the MACD is pointing to short-term uptrend with a bullish cross above its center line on the charts in the coming days.

AUD / NZD daily chart

audnzd price chart

Diagram created with TradingView

AUD / NZD TRADE RESOURCES

— Written by Thomas Westwater, analyst for DailyFX.com

To contact Thomas, use the comment field below or @FxWestwateron Twitter

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