NZD/CAD in focus ahead of important New Zealand and Canadian data

December 19, 2017 09:25 AM

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As mentioned in my earlier post, trading is likely to wind down ahead of Christmas, but there are a number of currencies which may experience increased levels of volatility from time to time this week. Chief among them is the Canadian and New Zealand dollars. That’s because we will have important economic data from both nations this week: GDT Price index and GDP from New Zealand, and core CPI and retail sales from Canada. This makes the New Zealand dollar/Canadian dollar (NZD/CAD) currency pair one of the more interesting pairs to watch. Ahead of the data releases we are somewhat bullish on this pair because of (a) technical reasons – see below – and (b) Canada’s crude oil problems, where a glut has formed and prices have plunged as its main customer, the US, continues its drive in becoming self-sufficient in its energy needs due to the shale revolution.

Ahead of the above data releases, the NZD/CAD could be in the process of forming a rounded bottom. It has broken its market structure of lower lows and lower highs after its recent upsurge of long-term support around the 0.8650 regions. In addition to this, there are a few other technical considerations that also point to higher prices. Among them, the behavior of price action in the last run down before the move up to the high of 0.9920/5 looks very similar to the most recent downward move. If past price action is anything to go by – which is basically the basis of technical analysis – then one could reasonably expect it to form a similar path and potentially head towards parity.

The bears, however, would argue that with a price being below the 200-day average and below the most recent significant swing high at 0.9750 that the path of least resistance remains to the downside and that this recent pullback could just be a normal retracement in what still is a downtrend. In addition, a potential Head and Shoulders reversal pattern could be forming with the neckline coming in around the 0.8650 area.

The truth is no one knows what’s next and projecting a 1000-pip rally, let alone holding it for that long, is a very difficult task. So, what’s the point of talking up the prospects a potential rally if you are not sure it will come to fruition, you may wonder? Well, regardless of what happens, it is always a good idea to have solid reasons and know which direction price is most likely to head towards. Once you work out the path of least resistance with a certain degree of confidence, then focusing on finding opportunities in that direction can make trading a lot easier. In any case, I am of the view that one should trade from one level to the next, and move on to the next opportunity. As they say, trading is a moving business, not storage.

With that in mind, and given the above considerations, my main bullish objective is the next area of resistance, which was previously supported, at around 0.9180 to 0.9220. If, when and how price gets to this area and what it does there, then one can easily revise their views. Short-term supports that the buyers need to defend are at 0.9000, 0.8925 and 0.8820. Clearly, if the higher levels of support are defended then this would suggest that the bulls are in firm control, while the deeper price pulls back now, the lower the odds of the bulls remaining in charge for too long. In any case, my bullish view would become invalid in the event the NZD/CAD breaks below the most recent low around the 0.8650 area.

About the Author

Fawad Razaqzada is market analyst at FOREX.com and City Index brands of Gain Capital.