AUDCAD And AUDNZD Approach Extreme Resistance Zones As Markets Await Interest Rate Decision

Markets Have Been Pricing In Optimism Around The Australian Dollar For Months

Tonight, major inflation data from Australia will be released alongside the interest rate decision and policy statement from the Reserve Bank of New Zealand ‎(RBNZ)‎, while the entire forex market remains heavily focused on the Australian and New Zealand dollars.

However, while markets wait for the data and central bank statements, from a technical perspective several currency pairs already appear to have reached extremely stretched levels after many months of almost uninterrupted bullish movement.

The two pairs currently standing out the most are ‎AUDCAD‎ and ‎AUDNZD‎.

AUDCAD Is Reaching An Area Where Profit Taking Historically Appears

On the monthly chart of ‎AUDCAD‎, it can clearly be seen that the price completed an extremely aggressive bullish move for more than six consecutive months with almost no significant red monthly candles.

The pair is now approaching a major historical resistance zone while technical indicators are also beginning to enter extreme territory.

From a technical perspective, these are exactly the types of areas where long term buyers often begin taking profits after an extended rally.

Have Retail Shorts Already Been Wiped Out Of The Market?

After more than six months of consecutive bullish monthly candles with almost no meaningful downside corrections, both ‎AUDCAD‎ and ‎AUDNZD‎ have reached resistance zones where significant shifts in market behavior sometimes begin to appear.

In situations like these, many long term buyers are already sitting on large profits and begin looking for profit taking opportunities.

At the same time, after such an aggressive rally, many retail short sellers have already been forced out or completely wiped out during the move higher.

Ironically, this is often the stage where more professional short sellers begin entering the market, waiting patiently for months for extreme resistance zones and situations where markets appear excessively stretched both technically and psychologically.

AUDNZD Is Already Trading Above Its Technical Channel

As can clearly be seen on the attached chart, ‎AUDNZD‎ is already trading above the technical channel that contained the price action for a long period of time.

Historically, in the vast majority of cases when price aggressively breaks above a long term channel after a sharp rally, even if the bullish move continues temporarily, the market usually returns at some stage to retest the channel area.

Situations like these often indicate a market entering a temporary extreme condition, especially when the move is accompanied by a long sequence of bullish monthly candles without any meaningful correction.

The further price moves away from the original technical structure and long term moving averages, the greater the risk of sharp volatility and aggressive profit taking becomes.

AUDCAD Is Also Moving Far Away From Long Term Moving Averages

In ‎AUDCAD‎, the market is also beginning to move significantly away from its long term moving averages after the latest aggressive rally.

In our opinion, once a larger correction eventually begins, there is a strong probability that the pair will attempt at some stage to retest the monthly ‎200‎ moving average, which remains one of the most important technical areas for the long term structure of the market.

Historically, after periods where price becomes excessively stretched away from moving averages, markets often perform deeper corrections in an attempt to return toward technical equilibrium.

Markets Are Already Extremely Bullish On The Australian Dollar

From a fundamental perspective, markets have been pricing in a relatively hawkish environment from the Reserve Bank of Australia ‎(RBA)‎ for quite some time.

High inflation, rising energy prices and fears of renewed global inflationary pressure pushed many investors to continue buying the Australian dollar during recent months.

However, in situations like these, markets sometimes create the most dangerous scenario possible for momentum buyers.

When almost everyone already turns bullish and expects continued upside, sometimes all it takes is for the data to come out merely “good” instead of “excellent,” or for the central bank to sound slightly less hawkish than expected, to trigger an aggressive wave of profit taking.

Could We See A “Buy The Rumor, Sell The News” Scenario?

One of the most interesting scenarios heading into tonight is the possibility that markets have already priced in almost all of the positive expectations.

In such a situation, even if Australian inflation data comes out relatively strong or the ‎RBNZ‎ sounds hawkish, the initial market reaction could still become a sharp spike higher followed by aggressive profit taking.

Especially when the monthly charts already appear extremely stretched from a technical perspective.

Markets Are Approaching A Major Decision Point

In our opinion, the current zones in ‎AUDCAD‎ and ‎AUDNZD‎ could become some of the most important decision points of the coming week in the forex market.

On one hand, continued inflation pressure and higher interest rates could continue supporting the Australian dollar.

On the other hand, after many consecutive months of aggressive upside movement without any significant correction, the risk of profit taking and sharp volatility is beginning to increase substantially.

Conclusion

Tonight’s interest rate decision and central bank statements could become a major trigger for both ‎AUDCAD‎ and ‎AUDNZD‎.

However, beyond the economic data itself, from a technical perspective both pairs already appear to be trading at significant extreme levels after an unusually aggressive rally.

In situations like these, sometimes even a relatively small trigger can become enough to begin a sharp correction.

It is important to emphasize that this article does not constitute a recommendation to buy, sell or perform any action in the foreign exchange market. This article reflects technical analysis, personal opinion and market interpretation only.

Disclaimer: This article does not constitute investment advice, financial advice or a substitute for independent judgment. The information provided is for educational and informational purposes only. Trading financial markets involves substantial risk of financial loss.