NZD/USD: Kiwi crushing overdone?

<p>The NZD/USD’s long-term downward trend has accelerated in the past couple of months. It has been driven lower by a number of factors, including the […]</p>

The NZD/USD’s long-term downward trend has accelerated in the past couple of months. It has been driven lower by a number of factors, including the sharp falls in key commodity prices for the New Zealand economy such as powdered milk, the RBNZ turning dovish with a surprise rate cut and the US dollar rally gaining momentum on increased safe haven demand and speculations about a Fed rate hike at the end of this year.  But has the selling been overdone? Though we expect the Kiwi to head further south over time, it is starting to look a little bit oversold in the short term, so the risks for a counter-trend move are high.

Indeed, as can be seen from the sub-chart, the Relative Strength Index (RSI) is at extremely oversold levels between 20 and 30. The last time the RSI was this oversold, back in early February, the NZD/USD went on to stage a +550-pip rally. That rally eventually came to a halt at the end of April. Since then, price has been heading sharply lower inside a bearish channel. Not only has it broken below the February low, it has now fallen almost exactly how much it had rallied since that month’s base was established. In other words, the Kiwi has reached the 200% retracement level of its upswing from the February low. This marks an exhaustion point in the market. What’s more, price has also reached the lower support trend of its bearish channel.

Thus, given the convergence of the abovementioned technical factors (namely the 200% exhaustion level, the support trend of the bearish channel and the extremely oversold RSI), the risks are high that price may stage at least a mini-rally from here.

That being said though, we remain bearish on the NZD/USD for as long as price holds inside the bearish channel. It is well worth watching the key resistance levels that come in or around the resistance trend of this channel, including the previous support-turned-resistance at 0.6810. If that level breaks down and the Kiwi also breaks out of the bearish channel to the upside then it could easily rally to the psychological 0.70 handle before it decides on its next move.

Speaking of the psychologically-important levels, the next one for the bears is at 0.6500. Thereafter, the next potential support could be at the 261.8% of the aforementioned price swing at 0.6255.

15.07.08 NZDUSD

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