NZD/USD bounces off key support, but downward trend not over

The NZD/USD currency pair has bounced back after it fell overnight to its lowest level since February on the back of the disappointing Chinese data that was released at the weekend. The FX pair has been supported in part by the mixed-bag data out of the US where the industrial production surprisingly fell 0.1% in August while the Empire State Manufacturing Index unexpectedly jumped to its highest level since October 2009. The mixed US data has caused the dollar to again pause for breath, a development that is likely to repeat as we approach Wednesday’s FOMC meeting. If so, this could spur a short-covering rally on the Kiwi and other FX pairs that have taken a battering of late.

From a technical point of view, today’s bounce back makes sense for this has happened around a key support area, namely 0.8120/35. This is where a couple of Fibonacci levels converge: the 61.8% retracement level of the last major upswing meets the 161.8% extension of the move up from June here. On top of this, the daily RSI has reached the oversold territory of 30, making a bounce back more probable even if the fundamentals still point lower.

But taking a closer look at the 4 hour chart (in figure 2, below) and we can see that despite today’s bounce back, the currency pair remains in a protracted downward trend inside of a bearish channel. But here too, some of the secondary indicators have seemingly turned positive: the MACD, for example, has created a bullish crossover (albeit it remains below the key 0 level) while the RSI has broken above a bearish trend. Still, there are many resistance levels that need to be broken before we could start talking about a potential change in the trend. The first such level is at 0.8210 while the next one comes in at 0.8260 which is not only an old level of support but it also ties in with the resistance trend of the bearish channel.

Meanwhile the downward trend could resume if and when price drops below the 0.8120/35 support area. If so, the bears could immediately target 0.8050 – the February 2014 low. Beyond that is the 78.6% long-term Fibonacci retracement level at 0.7930.