FxWirePro: NZD/USD hammer and dragonfly dojis cushion for interim bulls – Need for directional hedging on Fed’s hawkish stances

Last week, NZDUSD tumbled as shooting star pop-up at the peaks of rallies at 0.6405 levels, but if you look further backwards, the current rallies are served by the hammer and dragonfly doji pattern candles at 0.6253 and 0.6290 levels respectively. 

We could see some buying interest, for now, upon the bullish momentum signalled by both leading oscillators (RSI & Stochastics) as they show upward convergence and the bullish DMA & MACD crossovers to substantiate (refer daily chart). 

Currently, the pair is testing stiff resistance of 0.6437-0.6445 levels, the decisive breakout above this crucial resistance can expose bullish targets to 0.6550 levels.

Contrary to that, any failure swings can bring in renewed bearish traction towards 0.6343 and even up to 0.62 levels.

On a broader perspective, the major trend has breached triangle support and slid below 7-EMAs (refer monthly chart).

Although the momentum oscillators seem to be indecisive but remain bearish bias to back up further downtrend.

Observe steep slumps below EMAs on breach below neckline on this timeframe, this reminds us the major downtrend as both leading and lagging indicators are still bearish bias in the major trend.

Trading tips: Contemplating above technical rationale, on trading grounds, at spot reference: 0.6396 levels, we advocate executing tunnel spread options strategy with upper strikes at 0.6437 and lower strikes at 0.6343 levels, the strategy is likely to fetch leveraged yields as long as the underlying price keeps sliding towards lower strikes on the expiration.

USD appeared weaker as the Fed delivered on its so-called hawkish cut yesterday: a rate cut by 25bp to keep funds rate at 1.75%, two FOMC members voted against the step and there was one dove (James Bullard) who was content with 25bp rather than 50.

As the interim rallies are foreseen to be extended up to 0.6486 – 0.65 levels in short run, we advocate initiating longs in NZDUSD futures contracts of November’19 delivery as further upside risks are foreseen and simultaneously, shorts in futures of December’19 delivery for the major downtrend. Thereby, one can directionally position in their FX exposures. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately.