By Forex Mansion
The AUD/NZD currency pair is one of the most traded currency pairs on the forex market today. The Australian dollar is the fifth most traded currency, and the New Zealand dollar is the 10th most traded currency. In order to properly trade these two currencies, it is essential to stay abreast of all the macroeconomic indicators that affect the currencies and to know how to analyze the AUD/NZD chart and respond accordingly.
Key Indicators – Don’t Leave Home Without ‘Em!
The key macroeconomic indicators are interest rate, other related currency pairs, commodities, balance of trade, consumer price index (CPI), gross domestic product (GDP), and budget deficit:
• The interest rate set by the central banks as a large effect on the value of currency. For the AUD/NZD trade one must check the rates set by the Reserve Bank of Australia against those rates of the Reserve Bank of New Zealand. Higher interest rates generally translate to higher currency values because they attract investors.
• The currencies that most affect the AUD/NZD trade are the US dollar, the Euro and the pound sterling. The Australian and New Zealand dollars tend to have a positive correlation to each other in respect to these other currencies. Therefore, when the NZD strengthens against the USD, one can expect the AUD to strengthen against the USD as well.
• Commodities always have a strong impact on currency values. Generally speaking, global commodity values have a negative correlation to global currency values. However, more specifically relating to a specific country, the commodities consumed by that country’s export will have a negative correlation with that country’s currency, while the commodities actually exported will have a positive correlation.
• The balance of trade is the calculation of a country’s total exports against their total imports. If the exports exceed the imports in value, there is a trade surplus, and one can expect the value of the currency to appreciate. If there are more imports than exports, there is trade deficit, and one can expect the currency to devaluate.
• The consumer price index (CPI) is a measure of inflation. CPI measures the average amount that households spend on basic goods and services. The more they are spending, the lower the value of the currency is. The lower the CPI is, the lower inflation is and the currency therefore has a higher value.
• The GDP is the total value of all goods and services produced by the entire economy of a country. The GDP is a very accurate indicator of the strength of a given economy. High GDP means high currency value.
• The budget deficit’s effect on currency values is arguable, because on the one hand government debt being owned by foreign nations reduces the value of currency, however, on the other hand high deficits tend to cause central banks to raise interest rates (which in turn has a positive effect on the value of the currency).
Other Important Factors of Chart Analysis:
The key elements of chart analysis are the relative strength index (RSI), the stochastic oscillator, moving average indicators (MA), the parabolic SAR indicator, the directional movement indicator (DMI), and the rate of changer indicator:
• The relative strength index (RSI) is a common tool used to indicate momentum. The RSI can tell you if a currency was overbought or oversold. The RSI is measured from 0-100, where 70 and up generally means a currency has been overbought, while 30 and below generally indicates the a currency has been undervalued (and therefore would be good to buy).
• The stochastic oscillator is a good aid for determining market trends. The stochastic oscillator takes into account peak and closing values over a period of 14 time denominations (hours, days, weeks, and so on…). The theory behind the calculation is based on the assumption that upward trending markets will close relatively near their high. This calculation also produces a score between 0-100, where above 80 can mean that a currency is towards the end of an upward trend and below 20 can mean that a currency is towards the end of a downward trend.
• Moving average indicators are, like their name, indicators of the average value of the currency taking its various movements into consideration. The indicator tends to lag, therefore it is recommended to buy when the value is above the MA and sell when the currency value is below the MA. There are multiple MA’s and it is recommended to cross-reference them for best results.
• A parabolic SAR indicator is a mathematical calculation intended to forecast when the curve on the chart (the parabola) will change direction (“Stop and Reverse”). Knowing when the currency chart will change direction means knowing when to buy or sell. This indicator is less accurate in highly volatile markets and should always be cross-referenced with other indicators.
• The DMI is another indicator that determines the strength of a given market in order to monitor trends. The DMI produces a calculation known as the average directional movement index (ADX). When the ADX is 20 or above, that means there is a strong upward trend.
• The rate of change (ROC) indicator is simply the difference in value of a currency over 2 or more given time periods. This is an especially good indicator when comparing multiple currencies at once in response to recent events that greatly affected the market.
One who follows the indicators in order to properly analyze the AUD/NZD chart, while simultaneously keeping in mind all the macroeconomic indicators will draw great profits from the buck and kiwi trade.
About the Author
Looking to make sense of trading AUD/NZD currency pairs? This article will explain two systems of analyses, macroeconomic analysis and chart analysis, for optimal trading.
