NZDUSD – Elliot Wave Indicating Bearish Leg Ahead

Key Points:

• Elliot Wave completes “E” wave.

• Expect a retreat towards the lower channel constraint.

• Support at 0.7000 likely to hold fast.

The past few days have been relatively encouraging for the Kiwi Dollar bulls, as the pair has soared back above the 0.7100 handle. This is a surprising turnaround given the market expectations evident following the hike in the US Federal Funds Rate. However, despite the NZD’s recent buoyancy the pair could be setting up for a significant pullback towards the key 70 cent handle.

In particular, a cursory review of the pair’s technical indicators should be ringing some alarm bells for the cautious traders amongst us. Price action is currently trading within a clear bullish channel, on a 4-hour timeframe, in a wave fashion. The reversal points near the top of the channel are relatively clear, as is the Elliot wave formation that has recently reached its zenith at the “e” wave.

In addition, both the RSI and Stochastic Oscillators are telling a similar story with the indicators largely having reached into reversal territory. In fact, the last time the RSI Oscillator was within this reversal zone a sharp pullback towards the bottom of the channel was seen.

Subsequently, there are some key technical indicators which are suggesting a reversal, or bearish wave towards the lower channel constraint could be upon us. A relatively likely outcome would be price action declining from its current level at 0.7120 back towards the bottom of the channel at 0.7020 in the early part of next week. Obviously, at that point the key 70 cent battleground will be in focus but it’s likely that the, at least in the short term, that the NZDUSD will hold above that level.

Fundamentally, there are also plenty of reasons to suggest that the Kiwi Dollar will depreciate in the short to medium term. Chiefly amongst those concerns is the potential for a range of rate hikes from the US Federal Reserve throughout 2017. Therefore, the market expectation of near term hikes is likely to continue to be factored into the NZDUSD sentiment and this is only likely to have a depreciatory impact upon the pair. Subsequently, the NZD is likely overvalued given some of the fundamental factors at play, at least in the medium term.

Ultimately, the pair will see some selling in the coming week but in all likelihood this will stall around the support zone at 0.7000. However, the medium term takes a different direction entirely and I feel comfortable suggesting that we are likely to see a NZDUSD valued well below the 0.6950 level as we move closer towards the inevitable Fed interest rate hikes.