NZD/USD breaks double-top neckline on dovish RBNZ

The Kiwi has made a significant technical breakthrough after the RBNZ shifted into a neutral policy stance overnight. As a reminder, the central bank dropped a line from its statement that read “…some further increase in the OCR is expected to be required at a later stage,” and changed it with “…we expect to keep the OCR on hold for some time.” They were also more downbeat on inflation and economic growth. This means therefore that instead of a rate hike, the RBNZ may actually loosen policy at some point in the future. The US Federal Reserve meanwhile gave little away in its policy statement last night. It repeated the phrase that the Fed will be “patient” in starting a rate hiking cycle, sounded more upbeat on economic growth and downbeat on inflation. In other words, the Fed still looks like the first major central bank that would actually raise interest rates, meaning that the USD’s bullish momentum has been maintained – for now. Given the RBNZ’s sudden change of tone, the NZD/USD could fall a lot further now as speculators unwind their bullish bets.

From a technical point of view, the NZD/USD has broken the neckline of a long-term double top reversal pattern at 0.7370. This therefore may have paved the way for further technical selling. As can be seen from the chart, the distance between the peak and base of the double top pattern is approx. 1465 pips. This gives as projected target of around 1.5905 (7370-1465). Admittedly, this is some distance away and it may take a very long time to get there, if it does at all. After all, it is worth remembering that the RBNZ still pays the best interest rate (3.5%) among the major central banks. Therefore, a more realistic near-term target for the bears could be 0.7000 in the near term. As well as a psychologically-important level, 0.7000 is also just 30 pips away from the 161.8% Fibonacci extension level (0.6970) of the last significant upswing i.e. the rally from 2013 to 2014. At this stage, the key resistance level to watch is the broken neckline at 0.7370. A potential break above this level would make the near-term technical outlook a bit murky.