Exit Christmas Contracts
The IMC blog entered a long position in the December Australian dollar/New Zealand dollar spread at 3.42 cents (premium Aussie) on September 22nd. With the upcoming expiration of the December contracts, it is time to roll to the March spread.
Two and a half months after entering this spread, it is sitting at nearly the same level as the purchase price! As they say down here in the South, “This dog won’t hunt.”
However, the blog is maintaining a long position because the macro view indicates that we are holding the spread at a price that is historically cheap and previously unsustainable. As you can see on the weekly nearest-futures chart, buying the spread below four cents would have led to profitable trades as the spread more than doubled off the lows. So we’re willing to sit patiently to see if this sort of wager will pay off once again.
Near-term Price Hurdle
The March Australian dollar/New Zealand dollar spread rallied in the late summer and peaked out at a price of 5.31 cents on August 9th. After a plunge to new multi-month lows in mid-September, the March spread once again reversed and ran higher. The one-month run topped out at 5.27 cents on October 14th.
The similar August and October highs form a price hurdle for the March Australian dollar/New Zealand dollar spread. However, this is good news!
Because the price hurdle creates a clearly-defined breakout point. A sustained close above this level would signal that the spread is finally serious about making a recovery. Since such an event would mean that the current long position has an open profit to cushion it, aggressive traders could add to long Australian dollar/New Zealand dollar spread position on the breakout.
Exit the long December Australian dollar/New Zealand spread and simultaneously purchase a March Australian dollar/New Zealand spread at the market-on-close on Wednesday, December 7th. Initially, the spread will be liquidated on a two-consecutive day close below 2.00 cents.
‘Add-On’ Trade Strategy:
For tracking purposes, the IMC blog will make a hypothetical ‘add-on’ trade by buying one March Australian dollar contract and simultaneously selling one March New Zealand dollar contract if the spread closes above 5.31 cents (premium Aussie). If filled, the spread will initially be liquidated on a two-consecutive day close below 3.42 cents.