NZD Poised to Breakout Despite Recent Ranging Phase

Key Points:

• Resistance may be less robust than is immediately apparent.

• Underlying technicals suggest a breakout is warranted.

• The resulting rally could extend as far as the 0.7379 handle rather quickly.

The Kiwi Dollar’s rally has proven to be remarkably resilient over the past week, the pair largely resisting the urge slip lower despite some rather bearish technical readings. Moreover, this week has seen both a 0.8% contraction in the GDT Price Index and a dovish decision from the RBNZ regarding the OCR – two fundamental developments that would typically send the pair reeling. As a result, the question is now being raised, will the long-term trend line hold or will a breakout be seen going forward?

If we take a look at the daily chart, initially, there seems to be a fairly solid argument in favour of resistance remaining intact. For instance, the combination of that long-term trend line and some long wicks on recent candles provides a fairly potent signal that the bulls are beginning to lose their grip on the pair. Furthermore, we have seen the Parabolic SAR invert which now suggests that a near-term downtrend could be warranted moving forward.

Nevertheless, upon closer inspection, this forecast may not be as clear cut as it at first appears and there is evidence to suggest that we might, instead, see an upside breakout relatively shortly. The obvious technical reading in dissent is the EMA bias. As shown above, all three averages are in their most bullish configuration and hinting that buying pressure may yet be seen. What’s more, this bias is reinforced by the current ADX readings which are sitting at around the 45.0 level – a sign that a very strong trend is in play. 

It is also worth noting that the recent ranging phase has pushed stochastic readings out of overbought territory. The removal of yet another cap on upside potential will surely not have gone unnoticed by the markets and many bulls will now be waiting for the right moment to make a move. However, we may have to wait another week or so before any major push higher is seen as the trend line and the 0.72 support likely need to converge to a greater degree.

Ultimately, keep an eye on the Kiwi Dollar as it may have a surprise in store for us yet and this might see it all the way back up to around the 0.7379 mark. Technically, the pair certainly has some strong evidence signalling that this is not only possible but actually rather likely. From a more fundamental perspective, next week’s NZ trade data could prove to be what is needed to get a breakout started so don’t neglect the news feed and risk missing out on any resulting upswings.