Yesterday, we outlined a big picture framework for thinking of the broad-based U.S. dollar rally as a rising tide, led by the rotation of individual waves, or currencies. In that article, we highlighted the commodity dollars (CAD, AUD, and NZD) as the strongest candidates to lead the next wave of dollar strength; each of them are losing ground against the greenback today, but the NZD/USD may be offering the most actionable technical setup of the bunch.
After bouncing back to .7975 early this week, NZD/USD has rolled over to create a lower high on the daily chart. More significantly, the RSI has formed a clear Negative Reversal pattern, where the RSI actually makes a higher high, despite the exchange rate putting in a lower high. This development indicates that price is underperforming the underlying indicator, or that prices have become more oversold at a lower price.
In addition, the currency pair put in a Bearish Pin Candle*, or inverted hammer formation, off resistance at the 50-day MA and 23.6% Fibonacci retracement yesterday. This candlestick pattern shows an intraday shift from buying to selling pressure and often marks a near-term top in the market.
If these bearish technical indications are correct, NZD/USD may drift lower throughout the rest of the month. The Negative Reversal pattern projects a measured move target all the way down at .7640, below support at the 2-year low near .7680. Over the next 24 hours, traders will get a series of high-impact economic reports that could impact NZD/USD, including FOMC minutes later today, Chinese HSBC Manufacturing PMI tonight, and US CPI tomorrow. While not our favored scenario, a break above this week’s high at .7975 would invalidate the Negative Reversal pattern and suggest a larger bounce in NZD/USD is possible.
*A Bearish Pin (Pinnochio) candle, or inverted hammer, is formed when prices rally within the candle before sellers step in and push prices back down to close near the open. It suggests the potential for a bearish continuation if the low of the candle is broken.