NZD/USD has formed what may be construed as bearish flag formation. But after Wednesday’s more hawkish than expected RBNZ, traders should be prepared for a reversal as much as they are primed for any continuation of the recent downtrend. Also, keep in mind that the Kiwi has found support from the recent paring back in Fed interest rate hike expectations, which may not prove temporary.
Wednesday’s high of 0.65144 was in striking distance of the last May 5 swing high of 0.65686. Should the latter be breached, that could signal buyers that the downward trend in NZD/USD may be reversing soon. Likewise, the price breezed past the 50% and 61.8% Fibonacci retracement level between the last swing high and the May 12 swing low of 0.62166. In other words, there is enough reason for bears to be cautious at current levels.
With the price well below its 200-day exponential moving average and given the prevailing uncertainty in financial markets, bulls may be less apt to push the currency pair higher. Similarly, single Japanese candlesticks in recent days haven’t told much of a story in terms of momentum in either direction. A daily RSI sitting near the 50 mark provides an equally ambiguous signal.
For traders with strong bearish convictions about NZD/USD at these levels, the conservative approach may be to wait for a breach of the lower diagonal support of the flag formation and subsequent successful retest before deciding on sizing and entry of positions. The Kiwi’s sensitivity to global growth and risk appetite, two prevailing market themes at the moment, leave the Kiwi vulnerable to high volatility.