Aussie/Kiwi Spread: Returning to the Historic Low?!

Still Down Under

The IMC blog entered a long position in the September Australian dollar/New Zealand dollar spread at 4.31 cents (premium Aussie) on July 14th and exited at 2.11 cents (premium Aussie) on September 12th.  The break to new contract lows triggered the liquidation order.

This morning the Aussie dollar has a premium of less than two cents over the Kiwi dollar and the ratio hit 1.03:1.  There is currently nothing to stop this spread from returning to the April 2015 historic low of 0.61 cents.  Who knows, maybe the it’s on the way to ‘even money’ or even to where the Kiwi finally has the premium!

aussie-kiwi-spread-nearest-futures-daily

Aussie Kiwi spread (nearest-futures) daily

At some point, however, this trend will end.  We want to participate in the upswing when it happens.

Right now, there are two price points of interest on the charts.  The first is one we already mentioned: the April 2015 historic low of 0.61 cents.  If the spread gets here, we will be watching it very close to see what transpires.

The second point of interest is the July low of 2.67 cents on the December chart.  This was an important support level.  Now that it has been broken, it has turned into an important resistance level.  A close back above this price would indicate that a recovery is at hand and a close above the current September high of 2.86 would make the odds even more favorable.

december-aussie-kiwi-spread-daily

December Aussie $ Kiwi $ spread daily

I love Peter Brandt’s analogy for this “support turned resistance” idea.  He calls it the ice line.  Brandt says that the price low is like the ice on a frozen lake.  It supports you as you walk out on it to go ice fishing, skating, etc.  It should hold.  But if the ice cracks and you fall through, you are now underwater.  That ice line has suddenly turned into an overhead resistance barrier!  You need to get your head back above the ice and crawl out of the water if you want to survive.  For all you fellow Floridians who can’t relate to this idea on a personal level, go watch Fargo and you’ll get an idea of what I’m talking about.

For now, the blog will look to reestablish a long position in the Aussie/Kiwi spread if it can crawl it’s way out of the water.

Trade Strategy:

For tracking purposes, the IMC blog will make a hypothetical trade by buying one December Australian dollar contract and simultaneously selling one December New Zealand dollar contract if the spread closes above 2.86 cents (premium Aussie).  If filled, the spread will initially be liquidated on a two-consecutive day close .25 cents below the contract low that precedes the entry. 

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