NZD/JPY Breaks a Key Rising Trendline in a Double Top Attempt

NZD/JPY 7/24 4h chaNZD/JPY Breaks a Key Rising Trendline in a Double Top Attemptrt

RBNZ Decision:
Yesterday, the Reserve Bank of New Zealand (RBNZ) voted to raise the official case rate (OCR) by 25 basis points to 3.50%. In the official statement, RBNZ governor, Graeme Wheeler noted that it would be “prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level”

This statement suggests 2 things.
1) We should expect the RBNZ to hold rates for at least a couple of sessions, perhaps to late 2014.
2) There is still anticipation of rate hike, as the current rate is not considered “neutral”

For traders, we should expect some short-term bearish attempt, but in a medium-term consolidation context.

NZD/JPY 4H Chart 7/24NZD/JPY 7/24 4h chart

(click to enlarge)

In the daily chart, we see that the technical development essentially following this logic. Price stalled below the 89.92 high ahead of the RBNZ decision, and slide sharply after, breaking a rising trendline and thus showing short-term bearish outlook.

NZD/JPY Daily Chart 7/24 nzdjpy daily chart 7/24

(click to enlarge)

Note that this rising trendline came up from 2012’s 59.95 low, the origin of a 2-year bull run. This is a key trendline that just broke, and now NZD/JPY looks poised to push toward the 85.85 support pivot. 

When you look at the daily chart, you also note that the 85.85 represents the based, or neckline of a double top pattern that is developing. What should we think if price breaks down this 85.85 low and completes the double top? 

1) First, we should verify the double top. Because 2014 was a year of interest rate hikes, and more is to come after a break, I don’t think we should be so quick to jump on a bear market. There is support/resistance in the 87-87.30 area (where price is currently). If a pullback after a double top respects this area as resistance, the bearish outlook should gain confidence and materialize at least in the short term.

2) If the double top is followed by a push back above 88.00, NZD/JPY is likely to have set a low in the consolidation/correction pattern and could be ready for bullish continuation. In this case, traders will more likely look to buy on a dip, rather than to sell on a rally.

3) It should be noted that in the bearish correction scenario, where the double top is confirmed, we should not expect a bearish reversal to push below the 2014-low around 81.50. Again, the rally has been pricing in rate hikes, and there are still more to come after this initial round of 4-consecutive hikes in 2014. Consider a double top projection, using the width of the double top, projected from the neckline. The double top would be roughly 400 pips wide, which projects to 81.85. Even this is an aggressive outlook. I would start looking for support in the 84-84.50 area, which was consolidation support in February and beginning of March.

Final Words:
This article should lay the tracks on how to adjust our analysis going forward based on changing rate hike expectations. If the language in RBNZ statements start to reflect the fact that the rate hikes are working, but inflation pressure is rising, we should immediately start to look for evidence that the consolidation is bottoming in the daily chart, and should start looking for a bullish outlook. In the meantime, we can remain short-term bearish on NZD/JPY.

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