NZD/USD: Sell The Break Out

Key Points:

  • Key inflection point approaching.
  • Price action approaching lower channel constraint.
  • Any breach of the channel could signal new bearish phase.

The kiwi dollar could be preparing for another downside move in the coming days as price action appears to be setting up to breach the lower channel constraint. Specifically, the currency pair is fast approaching a probable point of inflection as it moves lower towards the 23.6% Fibonacci level which also coincides with the bottom channel line. Subsequently, there is plenty of risk for the venerable New Zealand dollar in the coming session with a range of technical indicators beckoning to the downside.

The past few weeks have been relatively rough for the kiwi dollar given its majestic decline from the 0.75 cent handle towards the bottom of the channel. The selling pressure has largely been fuelled by a combination of technical and fundamental factors with speculation ahead of the RBNZ and US Fed interest rate decision fuelling plenty of downside moves. Subsequently, price action has been under pressure but seemingly found some support to stem the losses right at the medium term trend line.

NZD/USD 4 Hours Chart

However, despite the pair’s relative resilience the downside pressures are again building and this time a critical inflection point around 0.7289 lays within its path. A cursory review of the charts demonstrates the corrective phase as price action has moved back above the 0.73 cent handle in an impulse wave fashion that could see a breakdown.

In addition, the RSI Oscillator is signalling bearishness as it also moves lover, within neutral territory. Also, adding to the technical bearishness is the MACD whose signal line has just cross to the downside and looks to be losing any upside momentum.

Subsequently, there are some fairly strong technical indications of an impending correction that could take the pair sharply lower in a new bearish phase. If indeed there is a breach of the lower channel constraint, we could see a fairly rapid move back towards the 0.7200 level and towards the long run trend line at 0.7050 in extension.

Fundamentally, the New Zealand dollar is also facing plenty of pain given that the Fed’s inaction is likely to spur the Reserve Bank of New Zealand towards interest rate cuts in November’s meeting.

The central bank has been strongly concerned with the kiwi’s current value and their contention is that the currency pair remains strongly overvalued. Therefore, there are plenty of external pressures on the RBNZ to act decisively, either through looser monetary policy or via jawboning to depreciate the NZD.

Subsequently, there are plenty of reasons, both fundamental and technical, to suggest that the pair is heading lower sometime soon. However, given that price action is currently facing a key inflection point, that decline may occur sooner rather than later.

Keep a close watch for any moves below the medium run trend line as it may be providing a relatively accurate precursor to a new bearish phase.

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