NZ Dollar Pierces Trendline vs. U.S. Dollar, Raises Chance of Trend Reversal Higher

Image © kasto, Adobe Stock

- NZD/USD piercing trendline; poised to make gains

- Clear break of line would bias pair to more upside

- Fundamental driver a better NZ growth outlook

The New Zealand Dollar looks to be in the process of reversing a long-term downtrend against the U.S. Dollar, suggesting further gains could be in store for the antipodean currency.

The trend line is drawn from the February 2018 highs and if it is successful it could be a major watershed moment for the exchange rate from a technical perspective.

Technical studies aim to predict future market movements based on the structure of the market, their main advantage being the ability to cut out the noise of day-to-day fundamental drivers such as economics and politics.

Trendlines are drawn on charts to clarify the direction of the trend. Once the direction is determined the assumption is that the exchange rate is will 'swim with the tide’ and continue in that direction. This knowledge can help analysts to forecast the future rate.

When a trendline is broken, however, it is an important moment for a currency pair since it usually indicates the trend originally delineated by the line is changing, or at the very least weakening.

Although the trendline on NZD/USD technically is still intact, there is a threat that the pair may break above the trendline, and such a break, on a daily or weekly closing basis, would be a strong bullish sign for the pair. Indeed it already looks very close to ending the current day above the trendline, constituting a verifiable break, and perhaps of a change of trend with it.

The pair is accompanied by relatively robust upside momentum which mildly supports a continuation of the young uptrend higher.

Momentum is bullish on the weekly chart where it is at the same level as it was when the pair peaked in November 2018 in the 0.69s marginally above the current rate. This suggests slightly pent-up bullish potential.

We see a break above the 0.7000 as critical and opening the way to a continuation up to an initial target at 0.7050. This is calculated using the time-honored technical method of taking the height of the rally immediately prior to the trendline break (x) and extrapolating 61.8% of it higher after the break (y).

Moving Average Blocking Way Higher

Despite piercing through the trendline and possibly reversing the downtrend one tough obstacle still lies ahead blocking the exchange rate's trend higher.

This is the 200-week moving average at 0.6957.

NZD/USD is likely to find it difficult to pierce through this MA and only a break above 0.7000 would definitively provide the green light needed for a continuation higher. Such a move would be expected to rise up to an initial upside target at 0.7050.

MAs are tough levels of dynamic support and resistance where prices often reverse and start moving lower, and there is a risk this could happen in this case, even if the pair manages to break above the major trendline.

A key risk on the fundamental front, meanwhile, remains external factors - or “imbalances” according to S&P - such as the ongoing trade war between the U.S. and China as well as the general fragility of the Chinese economy which is New Zealand's largest importer.

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