Whether It Breaks Or Reverts To This Years Trend 85 Is Key For NZDCAD

Just as NZD/CAD tests a key level of resistance, it’s worth considering its potential for a change of trend. Personally, I think the bearish trend on NZD/CAD has been one of the better ones for FX traders this year. Since failing to break a key resistance level in March, the commodity FX cross tumbled over 11% (or over 1000 pips) within a relatively clean downtrend.

Yet having tested the upper bounds of it bearish channel on the daily chart, NZD/CAD has approached an inflection point and there are compelling arguments for both bulls and bears to consider.

Bearish swing traders could take comfort in the following:

Price action remains within the bearish channel projected from the March peak, and the 100-day eMA is also capping as resistance.
Timing wise, yesterday’s high is eerily similar distance from its prior leak; the first spanned 85 days and yesterday’s spanned 82 days.
Whilst prices have recovered nearly 3% from this year’s low, the overlapping nature if price swings suggest the rebound is corrective, so poised to turn lower once more.
BoC have rates at a ‘whopping’ 1.75% compared with RBNZ’s 1.0%, which provides Canada a positive yield differential with New Zealand.

Contrarians (bulls in this instance) could take note of the following:

Net-short exposure on NZD futures remains near a historical extreme. The 3-year Z-score is around -3.5 standard deviations and the 1-year was recently below -2 SD, level which have been associated with a short squeeze historically. Ultimately, NZD could be vulnerable to short covering (as seen yesterday) if data improves and / or RBNZ are less dovish.
Whilst differentials currently favour CAD, markets will respond if they suspect this differential will narrow which would be positive for NZD/CAD. And as it’s possible RBNZ will hold at 1% so, if CAD data weakens, then it could well send NZD/CAD higher.
The CA2-NZ2 year differential is on the cusp of braking its bearish trendline.
Yes, prices have stalled near a cluster of resistance. Yet if these levels are to be broken it could trigger stops and exacerbate a bullish follow through.

Given the importance of 0.8500 resistance, NZD/CAD could well turn lower over the near-term. Yet due to the strength of momentum leading into resistance, an eventual upside break is the bias whilst prices hold above the 0.8347/63 lows. Also take note of the rounding bottom forming which, if successful, projects an approximate target around 0.8770.

Bears could look to fade into moves below the trendline and / or 0.8500 resistance
Bulls could wait for a break above 0.8500 to confirm the rounding bottom and target the 0.8700 highs (although target projects 0.8770)
Alternatively, for those who like to scale in, bulls could look for dips above the 0.83470/36 lows in anticipation of a breakout

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