A Risk-On 2017 Could Benefit NZD For A Swing Set-Up

2017-01-04 18:10:00

Tyler Yell, CMT, Currency Strategist

Bias: A Risk-On 2017 Could Benefit NZD For A Swing Set-Up

Point to Establish Short Exposure: Pending Entry Long at 0.7100

Spot: 0.7010 December 15 High

Target 1: 0.7239 December High

Target 2: 0.74028 November High

Invalidation Level: Close below 0.6925, 50% Retracement of 2016 Range

Highlights:

The overall trend is down in NZDUSD, and it is possible we are working on a classic Head & Shoulder’s pattern that would favor an aggressive turn lower. However, years of experience has taught me that it pays to keep an eye on pattern failures and their subsequent moves. A failed Head & Shoulder’s reversal could indicate that we could see NZD strength much like we have seen strength recently in emerging market currencies like the Russian ruble as well as other commodity-dependent G10 currencies such as the Stokkie or SEK.

The weekly chart below displays the Ichimoku Cloud and a long-term Andrew’s pitchfork dating back to 2011 for the handle. You can see the prices sitting above the Ichimoku Cloud and at the same time, sitting at what appears to be a Polarity Point (resistance turning into support) of the price action from late 2015 to present. The Spot price is combating with the possible head and shoulders pattern as well as the internal trendline resistance from Andrew’s pitchfork channel.

The New Zealand economy has positive developments in its favor such as the yield trend and improving commodity terms of trade. However, it does not appear prudent to take a spot trade long now, and I will keep an eye out for a possible for the weakening of the USD or strengthening of risk currencies to take NZD/USD above 0.7010, the December 15. A move above this level would also bring the price of NZD/USD above the daily Ichimoku Cloud so that the Daily & Weekly Ichimoku charts would be aligned Bullish.

Given the long-term favorability of US dollar strength, I prefer to look at this as a swing trade opportunity. Therefore, a trigger of the long NZD/USD trade would target the December and November high of 0.7239 and 0.7402 respectively. A close below 0.6925, the 50% retracement of the 2016 Range would invalidate anticipation of a move higher.

Chart: