It’s been another whirlwind Asian session in the forex market, with the volatility once again kicked off by a big devaluation of China’s currency. Despite claims that Tuesday’s 1.9% devaluation was a “one-off” adjustment, Chinese authorities opted to decrease the value of the yuan another 1.6% in today’s Asian session.
Not surprisingly, the upshot of this dramatic move was another lurch lower in Asian-Pacific currencies, which are heavily dependent on exporting commodities to China. Just when traders thought they had this clear causative relationship figured out though, the commodity dollars reversed back to the topside, with arguably the most dramatic move occurring in NZD/USD.
The kiwi briefly peeked out to a new 6-year low beneath .6470 early in today’s Asian session before reversing sharply back to the topside. As of writing, the pair has unwound all of yesterday’s losses and is currently testing an almost two-week high at .6630. If rates are able to rally further in today’s US session, it would create a big Bullish Engulfing Candle* on the daily chart, signaling a shift from selling to buying pressure and a possible bottom in the market. The secondary indicators confirm the waning bearish momentum: both the MACD and RSI have been trending higher since early July, and the latter has formed a rare quadruple bullish divergence with price.
Given the kiwi’s failure to maintain today’s Asian session losses and the technical signs of a turnaround, a short-term rally would not be surprising. If NZD/USD can conclusively break last week’s high at .6630, a further move up toward the 1-month high around .6750 is possible next. That said, the longer-term trend remains to the downside, so more conservative traders may prefer to fade any short-term rallies for an eventual drop toward the long-term 61.8% Fibonacci retracement at .6400.
*A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the sellers.
Source: FOREX.com