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NZD/USD drops to major support as kiwi extends correction

Amid the highly anticipated start of the Jackson Hole symposium on Thursday and speculation over key speeches to be delivered by Fed Chair Janet Yellen and ECB President Mario Draghi on Friday, the US dollar has remained relatively flat and in a tight trading range this week. One notable exception to this flatness has been the NZD/USD currency pair. Against the New Zealand dollar, the US dollar has extended its strength, pressuring NZD/USD down to a major support area around 0.7200 as of Thursday.

Previously in a sustained rally from a low of 0.6816 in early May up to a two-year high of 0.7556 in late July, NZD/USD began a serious correction early this month after Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler suggested that the central bank is open to possible currency intervention in order to cap the New Zealand dollar’s strength. That suggestion, coupled with the RBNZ’s currently dovish-leaning stance when it comes to interest rates, has placed heavy pressure on kiwi, prompting the NZD/USD pair to break down sharply below its previous uptrend.

In the process of this breakdown, the currency pair has formed a clear head-and-shoulders bearish pattern, which it has just tentatively broken to the downside. As noted, NZD/USD dropped down further on Thursday to hit key support around the 0.7200 support level, which is also near the 50% retracement of the May-July uptrend.

With a dovish RBNZ clearly preferring a weaker NZ dollar and ready to help push it down if necessary, pressure on the kiwi should remain, at least on a short-term basis. As for the US dollar, if Fed Chair Janet Yellen provides any hawkish hints during her Jackson Hole speech on Friday, that could help accelerate the NZD/USD fall. With any clear and sustained breakdown below 0.7200, the next major downside price objective is around the key 0.7050 support level.

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