NZD/USD: stage looks set for a sharp rally

The NZD/USD could be heading significantly higher over the coming weeks. Not only have commodity prices rebounded across the board, but the RBNZ has also recently turned neutral while the US dollar is refusing to push higher despite improvement in economic data there. The RBNZ is meeting again on Wednesday and any hawkish comments will likely send the NZD further higher.

But today we are not focusing on the fundamentals much. Instead, we are looking at the technical outlook for this pair. Below we have a weekly chart of the kiwi. While still not out of the danger zone, recent price action strongly suggests that a bottom may be in place.

Over the past several weeks, the NZD/USD has formed several doji-looking candles around the bearish trend line that had been in place since July 2014. These indecisive-looking patterns would have normally led to selling pressure if this was still a downward-trending market. But the lack of any significant follow-through strongly suggested that the trend was turning bullish and that a breakout was forthcoming.

The NZD/USD has now well and truly broken above the bearish trend line, forming a large bullish outside candlestick on its weekly chart. For the reversal to be confirmed, it will still need to rise above previous resistance at 0.6880 and the momentum indicator MACD will need to move above zero.

Given the recent price action, a break out appears highly likely. At the time of this writing, the kiwi was testing its 50-week moving average at around 0.6800. But the key risk event this week is the RBNZ meeting, so anything can still happen. A break below the key 0.6565 support level would invalidate this bullish outlook.

If and when the 0.6880 level breaks then the bulls may aim for the psychological handle of 0.70 as their next target. Above this level, the next potential resistance area is between 0.7200 and 0.7225 where the previous support meets the 38.2% Fibonacci retracement level.