The New Zealand dollar bounced back strongly from the 0.6920 area against the US dollar on the foreign exchange market last week after bears failed to hold the pair under the technically important 0.6920 level.
Risk-on market sentiment and a ramp up in commodity price helped lift the NZDUSD pair away from a technical danger zone. Based on the current price action and the US dollar’s inability to hold onto recent gains, I personally favour more gains for the kiwi over the coming weeks.
Digging into the technicals, the NZDUSD pair looks good in the short-term if the price can get back above the 0.7090 level. Interesting, a technical breakout above the 0.7200 level could cause the NZDUSD pair to explode towards a new 2021 trading high.
MUFG bank are also turning bullish towards the New Zealand dollar. A recent analyst report noted “We are recommending a long NZDUSD trade idea. We have been encouraged by the reassuring comments from the Fed leadership over the past week that have helped to dampen fears over a more abrupt tightening of Fed policy.”
MUFG also touched on central bank policy and noted “The NZD should continue to derive more support as well going forward from building expectations of RBNZ tightening.”
On the sentiment front traders have an increasingly bearish bias towards the New Zealand dollar right now. According to the ActivTrader market sentiment tool some 64 percent of traders are bearish towards the NZDUSD pair.
This should be considered a good sign as high levels of bearish sentiment amongst the retail crowd are probably needed in order for a major counter rally and short squeeze to commence.
NZDUSD Short-Term Technical Analysis
The four-hour time frame shows that the NZDUSD pair tested close to the bottom of a large broadening expanding wedge pattern last week. The NZDUSD pair has subsequently bounced from the bottom of the pattern and is looking more bullish, even though bulls are struggling with the 0.7100 area.
According to the overall size of the pattern, a price range of 0.6900 to 0.7800 could be about to play out over the coming week. Bulls ideally need to move the price above the 0.7100 level to get the bull party started.
A sustained break under the mentioned wedge pattern should be considered extremely bearish for the NZDUSD pair and could cause a steeper decline towards the 0.6600 area.
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NZDUSD Medium-Term Technical Analysis
Looking at the daily time chart it appears that an extremely large bearish head and shoulders pattern has formed, which is warning of a potential 300-point drop in the NZDUSD pair.
Bulls have moved the price back above the 0.7050 level, which is the neckline of the pattern. The NZDUSD pair is out of the danger zone while the price holds above the neckline of the pattern. Bulls need to move the price above the 0.7460 level to invalidate the pattern.
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