NZD/USD traded to its highest level in almost a year and a half last Friday before reversing sharply to end lower on the day. This left a so called “key day reversal” on the daily charts that warns a broader reversal could be in the works. Normally we don’t give too much credence to such high profile action, but the pattern has developed at a potentially important juncture for the pair from both a price and timing perspective. On the price side of things, Friday’s high in the Kiwi came at a convergence of a pitchfork line connecting the 2011 and 2012 lows and the 78.6% retracement of the 2011 range. Both are technically significant and denote levels where supply is likely to increase.
The bulk of technical analysis is focused on price or the X-axis of a chart. Very little is attention is put on the Y-axis of time - yet it takes up half the space. In our analysis we like to incorporate various techniques that address this oversight. These techniques are not the “Holy Grail”, but they do help identify points on a chart where a reversal (or acceleration) is more likely to occur. We seem to be at one of those junctures now in the Kiwi as a clear geometric relationship exists with the low recorded in early June of last year. A reversal is more likely to occur during this time in our opinion and the rare combination of negative price action at a significant resistance zone during a key time period increases our conviction.
NZD/USD Daily Chart: February 19, 2013
Charts Created using Marketscope – Prepared by Kristian Kerr
Wednesday should be important for NZD/USD. The Governor of the RBNZ Graeme Wheeler is slated to speak about the currency and given the Bank stated as recently as January 31st that the Kiwi is overvalued it does seem likely that an attempt to “talk it down” will be seen. However, how credible can any such talk be? The recent rash of positive economic data out of New Zealand all but eliminates the option of rate cuts. The real risk for the Kiwi in our view comes if the RBNZ steps up its intervention rhetoric or enters into the arena of untraditional policy via controls in the lending sector.
LEVELS TO WATCH
Resistance: .8490 (Minor retracement), .8525 (78.6% retracement of the 2011 range)
Support: .8415 (50% retracement of month-to-date advance), .8350 (2nd square root progression from Friday’s high)
STRATEGY – SELL NZD/USD
Stop: .8543 (-44 pips)
Target 1: .8415
Target 2: .8350
*After entry move stop to breakeven on touch of Target 1
Timeframe: 1 week
--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com
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