The NZD/USD pair fell during most of the session on Monday, although it needs to be stated that we had low volume due to President’s Day in America. This kept a lot of the larger New York offices closed, but the action was indeed telling to me.
The pair really caught a lot of traders off balance on Thursday of last week, as the market finally broke above the 0.85 level, signaling a potential new leg higher in this pair. The pair then turned around and fell right back to the launching point on Friday. The fact that we fell during the session on Monday, but found support in the heart of the previous consolidation has me thinking that the pair is going to try and break out again.
1,000 pips
The area that we have been consolidating in over the recent months is roughly from 0.75 to 0.85, and measures 1,000 pips in height. This is important, because a break out from this rectangle would have technicians looking at the move as being potentially 1,000 in length. In this case, a move above 0.85 would suggest that we are going to the 0.95 handle.
Don’t think it can happen? I would beg to differ. All one has to do is look at the players involved. The RBNZ has already made the mistake of saying it doesn’t feel threatened by a strong Kiwi dollar, while the Federal Reserve is trying to devalue the US dollar en masse. Because of this, there will be a certain amount of “safety” in buying the Kiwi, and this could have an avalanche effect. The most current example is the Euro against the Yen. We had the Bank of Japan working hard against the Yen, while the ECB seemed unconcerned about the value of the Euro at the moment. The pair has since skyrocketed in reaction.
Also, you have to think about the size of the banks. The RBNZ is nowhere as near as large as the Fed, and as a result they essentially will be very hard pressed to fight them. Because of this, a daily break and close above the 0.85 level becomes a buy signal for me.