The bond market seemed to be getting back to “normal,” as the yields have been recovering since March. However, recent volatility back-fired investors’ confidence due to the recent spike in 10-year Treasuries on Thursday.
Look at the 10-year yield chart above. The market has been preparing for the increased volatility as the yields were approaching the critical technical points, such as 1.3% (March high) and 1.47% – the pre-pandemic level.
On Thursday, the yields ramped through 1.5%, shocking the prices of risk assets by the frantic price action instead of supporting the bullish thesis.
Even if we believe that the risk assets are poised to rally eventually, the current sentiment of anxiety that the bond market has caused suggests safe-havens may be benefiting in the upcoming days.
Talking about safe-havens, the apparent “go-to” would be the US dollar. Let’s see what’s happening with the USD index (DXY) in the chart below.
Things change dynamically at the turning points. While sitting at the long-term support around 89.00, DXY keeps swinging between the key local levels giving various hints of where the dollar might eventually resolve – continue the long-term downtrend or rebound up, starting the new long-term uptrend.
After the market had unsuccessfully broken up the 91.00 borders of the H&S pattern at the beginning of February, the price stabilized under 91.00 for a while afterward, giving us bearish bias for the safe-havens. The action came back after the market pierced down the 90.00 local support, but couldn’t close under the price level, which caused a sort of short-squeeze in global safe-havens.
As the DXY finished the week with the strong full-body white candle right under support (old border of the H&S pattern), we can expect a possible breakout of 91.00 and a short-term move at least until 92.00 in case the market manages to hold above 91.00.
Why NZD/USD is an excellent candidate to short?
As the sentiment is not in favor of risk assets, the most apparent stance would be buying the dollar. Is there any risk currency that particularly “stands out” (not in the positive sense) to sell against the dollar?
Since the outbreak started, the markets have been susceptible to any virus-related events. Due to a recent case of COVID-19 in Auckland, the largest city in New Zealand, Prime Minister Jacinda Ardern imposed a 7-day lockdown on the city.
The Prime minister announced the decision at a news conference late Saturday after an emergency Cabinet meeting. The lockdown will start from 6 a.m. on Sunday, moving Auckland to alert level three, while the rest of New Zealand will get to level two.
NZD is in a shaky state, given an environment of erratic price action in bonds, rally in the dollar, and negative news from New Zealand. The markets cannot immediately price it all in, as traders can’t make transactions during the weekends. Therefore the new week may open sharply lower.
Below is the weekly NZD/USD chart. Last week closed aggressively down, forming the shooting star candlestick pattern, which is particularly bearish, as the body of the candle is black.
What magnifies the effect of the shooting star pattern is the presence of the appropriate price level nearby. As you see, the shooting star pierced the 0.7400 long-term resistance level, confirming the validity of a possible reversal.
An excellent way to take advantage of the setup would be to short NZDUSD as soon as possible on Monday, setting the stop-loss order above the candle’s high at 0.7465.
The logical target for the trade is near the previous resistance-turned-support at 0.6800. The trade has around a 1:2 risk-to-reward ratio with a favorable win rate.
Conclusion
The frenzy in a bond market caused the sentiment to shift into a defensive mode, providing traders with long opportunities in USD. The recent lockdown in New Zealand, along with the technical picture in NZDUSD, offer a great trade setup.
