One of the key skills to master in trading is how to differentiate short-term drivers from medium-term drivers. This is a skill that takes time and really requires a deep understanding of what drives currency markets. If you are very technically focused this skill will be counterintuitive to you. However, it is one skill you simply must master. It is also a skill that allows you to discover value. So, let’s look at an example of short-term vs medium-term trading.
Running up into the RBNZ meeting last week the expectations were that the RBNZ was going to hike rates. Medium-term the case was there. Unemployment low, inflation high, tapering stopped on July 23. The largest investment banks in the regions were predicting three hikes before year-end.
However, just before the meeting, short term sentiment changed. A single case of COVID-19 was found and this sent the nation into an entire lockdown. The expectations rapidly changed. The RBNZ was expected to now hold rates and the NZD rallied sharply higher.
This is the moment that you have a short term sentiment against a medium-term sentiment. How do you know? Well the RBNZ meeting was a clear tell. The RBNZ’s projections were for one hike this year and four the next. The medium-term picture was unchanged and the latest sentiment was only short term.
Think of it like this – you may argue with your wife or husband for one afternoon, but this doesn’t end the marriage. The short term sentiment is bad but medium-term it is still a good outlook. It is exactly the same in trading.
Watch for the change still
So, in this NZD example, the medium-term outlook could change, but that would need to see a significant increase in COVID-19 cases and a slowdown in the economy. For now, the RBNZ are on track for a hiking cycle. On Friday Governor Orr said that COVID cases alone will not stop a rate hike and needs to move on policy and cannot wait for uncertainty to lift. This means the New Zealand dollar keeps its medium-term bias and AUDNZD rallies & breakouts look suitable for selling.