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Fan Yang

Inflation Picture Turned AUD/NZD Back to Bearish

My outlook on AUD/NZD was bullish last week based on its technical picture. Even after a couple sessions of retreat, the overall mode still looked bearish. However, after Australia and New Zealand's inflation reports this week, the pair is likely back on a bearish trend.

First of all, we should acknowledge that inflation is one of the main indicators for currency direction. Why? Well, currencies really go up and down based on interest rates because interest rate ultimately shapes the supply and demand. Because interest rate policy is usually based at least in part on inflation, CPI numbers are very important for currency speculators. 

This week, Australia showed less-than-expected inflation, while New Zealand showed higher-than-expected inflation, both for Q4. Australia's inflation was at 0.5%, when the previous and forecast were both 0.7%. New Zealand's inflation was at 0.4%, when the previous and forecast were both 0.3%. How did the market react?

AUD/NZD 4H Chart 1/26

(click to enlarge)

2017 Rally Completed Turned Around:
- We can see that after Australia and New Zealand's CPI reports, AUD/NZD has basically walked back the entire rally we saw in the first couple of weeks.
- When we look at the Daily chart, we can see that AUD/NZD was on a bullish reversal attempt against the 2016 downtrend.
- We also saw that the 2016 downtrend has already stabilized into a sideways market. - We can say that the market is bearish-neutral. 
- Given the failed bullish reversal attempt, we should anticipate bears to dominate. Therefore, we should probably anticipate downside towards the 2016-low around 1.0240

AUD/NZD Daily Char
(click to enlarge)

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