NZDUSD builds a constructively bullish case

The bearish trend from the July high to the November low has had a reversal of fortunes. The USD was sent broadly lower after the Fed hiked rates, not only due to it being fully expected (therefore priced in) but because traders had hoped for a more hawkish event. That, combined with the news of a ‘market approved’ governor to take the helm at RBNZ has helped catapult NZDUSD to 8-week highs.

The move higher was not without warning though. After failing to hold beneath 0.6818 support and instead providing a false break in October, time allowed for a bullish divergence to appear on the daily timeframe. Furthermore, compression was also apparent on the RSI yet, on this occasion the RSI also broke its own resistance level to warn of a potential move higher with price. Yesterday’s break higher confirmed that warning and puts NZDUSD on the watchlist with a constructively bullish case.

Since November’s false break, a higher low has formed above the original 0.6818 support level. Additionally, yesterday’s range expansion broke the November high with seemingly little effort. So, we are on the lookout for either a low volatility pullback or evidence of price compression.

However, that we have just seen range expansion means we have to be patient and allow the market to pause for breath before jumping in. And whilst we have not yet seen price exhaustion near the upper Keltner Channel, it has rebounded from the lower to the upper band in a relatively short space of time compared with recent history. Hopping onto an extended move seldom ends well, so waiting for ether a low volatility pullback or evidence of price compression also allows one to fine tune their risk for a potentially higher reward to risk ratio. The November highs of 0.6963 to 0.6980 may provide a suitable support zone for such a retracement.

However, as bullish as this may appear now, markets rarely move in a straight line and there is a host of data for US and NZ which could throw a spanner in the works. Retail sales, trade data and PMI’s from US today (and GDP next week) is something to consider for USD bulls. And New Zealand also release their mid-year economic and fiscal outlook with quarterly GDP next week. Add to that, as NZD remains politically sensitive, we should take nothing for granted and let price action be our guide.