AUD/NZD breaks out

The New Zealand dollar’s slump continues. Poor domestic data followed by a dovish RBNZ and now cuts in growth forecasts by the government have all applied intense pressure on the kiwi in recent weeks.

The New Zealand dollar’s slump continues. Poor domestic data followed by a dovish RBNZ and now cuts in growth forecasts by the government have all applied intense pressure on the kiwi in recent weeks. At its latest meeting two weeks ago, the RBNZ delivered a dovish statement in which it suggested that monetary policy will remain accommodative for a long time. This was due to weakness in dairy prices combined with poor jobs and inflation data. Since then the NZD has been heading in pretty much one direction: south. Meanwhile the Australian dollar has held its own better, thanks mainly to firmer metal prices. As a result, the AUD/NZD has been able to steadily climb higher. Unless something changes fundamentally in the coming days, I think this cross will be heading further higher.

Indeed, the AUD/NZD has now cleared a key technical resistance level around the 1.0830-75 area, so the path of least resistance is now clearly to the upside. As can be seen on the chart, up until a few days ago the rallies had been capped by a descending trend line stretching back to the summer of 2015. The downside had been limited to an ascending trend line going back all the way to spring 2015. Within this long-term consolidation, the AUD/NZD had created several higher lows. While it is yet to make a distinct higher high, that could be about to change now given that the cross has broken its bearish trend line. This year’s earlier high was at 1.1020. If and when we clear that level then the bias would turn decidedly bullish for then we will have a higher high in place.

The next key bullish objective beyond 1.1020 would be the 127.2% Fibonacci extension level at just below 1.1200 handle. In term of support, the first line of defence is at 1.0935, followed by the point of origin of the breakout around 1.0875. While above these levels, the bias would remain bullish. However if the last low prior to the breakout at 1.0805 gives way then the bullish trend would technically end, unless we see something more bearish at higher levels first. 

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