NZD/USD: One last gasp rally to .7000?

<p>Yesterday, we outlined a potential bearish case for higher-yielding currency pairs like NZD/USD (see “Fed policy: Riding the market sentiment pendulum and the tail wagging […]</p>

Yesterday, we outlined a potential bearish case for higher-yielding currency pairs like NZD/USD (see “Fed policy: Riding the market sentiment pendulum and the tail wagging the dog” for more). In essence, traders’ expectations for Federal Reserve policy, long too hawkish, may now have swung too far in the other direction. That said, another round of weak economic data and Fedspeak (note both Fed President Dudley and Governor Powell will be speaking later this morning) could push the dollar a bit lower before we see a reversal.

As always, the NZD/USD chart can provide some key signposts to watch along the way. As of writing, the unit is consolidating around .6810, the 38.2% Fibonacci retracement of its entire April-August drop after this weekend’s mediocre Chinese economic data took the wind out of bulls’ sails. Not surprisingly, the secondary indicators are showing a mixed picture: the lagging MACD indicator is trending higher above its signal line and the “0” level, showing bullish momentum, but the RSI has moved into overbought territory above 70, signaling that bulls may be reaching an extreme level.

As long as the pair remains below last week’s high at .6900, we’re inclined to give the bears the benefit of the doubt and favor a pullback toward the .6500-.6600 support zone. That said, another round of dovish Fedspeak or weak economic data this week could extend the bullish trend a bit further. In that case, a move up toward the critical 200-day MA around the psychologically-significant .7000 level could be in play. NZD/USD has not eclipsed this indicator in over 14 months, so that level should provide strong resistance if reached.

NZDDAILY10-20-2015 8-22-36 AMSource: City Index

 

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