At the beginning of this month, we highlighted the cracks beneath the surface of the NZD/USD’s rally, highlighted the “extremely rare state of a quadruple divergence, where the exchange rate [had] made four higher highs, while the RSI indicator [had] made four lower highs,” and concluding that, “this phenomenon [showed] declining momentum on each additional high, foreshadowing a possible major reversal in the market.” Since then, the NZD/USD has continued to grind lower, and as of writing today, the pair has broken to a new 2.5-month low under the key .8500-25 zone.
As my colleague Chris Tedder noted in today’s Asian session, the fundamental catalyst for this drop was a six-month low in ANZ’s Business Confidence reading, and the selling pressure has carried over into today’s North American trade. On a technical basis, the drop through the .8500-25 area is particularly significant, as this level provided support on three separate occasions over the last 10 weeks. Moving forward, this previous level of support may now provide resistance on any short-term bounces.
Other technical factors are also suggestive of continued weakness in the kiwi. For one, the NZD/USD is putting the finishing touches on a Bearish Marubozu Candle*, showing strong selling pressure throughout the day and foreshadowing more weakness in the latter half of the week. Meanwhile, the RSI continues to trend lower within its bearish channel and has now entered “bearish mode,” where the indicator finds resistance at the 60 level. Likewise, the MACD continues to trend lower below its signal line and the “0” level, indicating growing bearish momentum in the pair.
With rates testing the 100-day and the RSI testing the bottom of its channel, a brief bounce is possible ahead of the weekend. That said, as long as previous-support-turned-resistance zone from .8500 to .8525 holds, the medium-term bias will remain to the downside. If and when rates break the 100-day MA, a move down to the 50% Fibonacci retracement at .8415 or the 200-day MA near .8340 will be favored. A recovery back above .8525, though not favored, would shift the bias back to neutral.
* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.