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NZD/USD looks set for a deeper pullback

The New Zealand dollar’s recent advance has come to a halt recently after the Reserve Bank of New Zealand suggested that interest rates may need to be cut further from their current record low of 2.0%. The NZD’s retreat has been particularly noticeable against the Australian dollar as the AUD/NZD pair has surged back above 1.0500 after dipping to as low as 1.0240. It looks like the US dollar is also now getting the upper hand on the New Zealand dollar, even though the former has weakened against many other currencies recently, including the Aussie. But there are a couple of things that could impact the USD today: US data in the form of durable goods orders and the Federal Reserve Chairwoman Janet Yellen’s testimony. Unless the data is significantly weak or Yellen says something dovish, expected the NZD/USD to depreciate further.

Indeed, the technical outlook on the NZD/USD is beginning to look more and more bearish as key supports give way.  As can be seen from the 4-hour chart, below, a bullish trend line has also broken down and the underside of it has since turned into resistance around the 0.7325 resistance level. Meanwhile a bearish channel has now been established after the kiwi put in a couple of lower highs and lower lows. So the path of least resistance on this time frame appears to be to the downside.

On the weekly chart, the NZD/USD has put in a few inverted hammer candlestick patterns. These candlestick formations suggest that the bullish thrust is fading fast, which is not a big surprise given the magnitude of the upsurge from around 0.6200 in August of last year to a high so of 0.7485 this year. The bullish struggle is confirmed further by the momentum indicator Relative Strength Index (RSI) being in a state of negative divergence (lower low) with price (higher high).

Consequently, the technical indications imply that the kiwi, just like the flightless bird, may not be able to fly but take a parachute jump.

Some of the key potential support levels, or bearish targets, to watch include the area between 0.7200 and 0.7225 which had been support in the past. Below here, the Fibonacci retracements could be additional targets to watch; in particular the 61.8% retracement level around 0.6980/5, because below that lies another key prior low in close proximity at 0.6955 and above it the psychological level of 0.7000 which is also a key support on the weekly time frame.

Our short-term technical bearish bias on this pair would become invalid upon a potential break above the resistance trend of the bearish channel. In that case, actually, the bearish channel would then turn into a bullish flag breakout scenario, which is anything but bearish. So, the key level to watch on the upside is around 0.7325 as a break above it would also re-establish the broken bullish trend line. For now though, the bears appear to be in the driving seat. 

Figure 1:

Source: eSignal and FOREX.com.

Figure 2:

Source: eSignal and FOREX.com.

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