The French elections, where a vote for populism didn’t dominate, provided the catalyst to send EURNZD hurtling higher. We had highlighted the bullish potential for EURNZD back when it closed above the bearish trendline, which suggested a bullish wedge was underway. Whilst we pondered on whether a move to 1.86 was feasible over the longer-term, we took comfort in the fact that near-term trading had shifted sentiment to favour the bulls and has remained in our buy-the-dip watchlist since.Prior to the election, we noted that EURNZD had tested the 38.2% with a bullish hammer, before bouncing higher within what appeared to be another bullish wedge formation. The wedge pattern projected a target of 1.55, yet Monday’s gap higher following the elections met the target immediately. If we are to view the wedge as a bullish flag, then the target now becomes 1.60.
Prior to the election, we noted that EURNZD had tested the 38.2% with a bullish hammer, before bouncing higher within what appeared to be another bullish wedge formation. The wedge pattern projected a target of 1.55, yet Monday’s gap higher following the elections met the target immediately. If we are to view the wedge as a bullish flag, then the target now becomes 1.60.
The weekend gap be a breakaway gap, as it follows on from a correction and still relatively close to the multi-year lows of 1.4536. Momentum since the gap higher is consistent with a breakaway gap, which occur at the beginning of sustained trends. Therefor we remain quietly confident that this is still early days of the trend and will remain in our buy-the-dip watch list for some time.
At current levels, it has paused beneath the July high and monthly R2. This could be an obvious level for a pullback but we also must consider the potential for volatility surrounding today’s ECB meeting. Whilst policy is not expected to change, traders are on the lookout for any comments from the dovish Draghi regarding a mere consideration for any tightening in the future. As he is ultra-dovish, even a slight change of this stance towards less dovish could result in Euro crosses exploding higher.
For the near-term, we note that EURNZD has shot up considerably higher than the y2 differentials between EU and NZ. This gap has to close, meaning the ratio has to move higher or EURNZD has to move lower. We think the potential remains for the spread to move higher at this stage as price action on EURNZD is constructively bullish and the underlying theme for s higher EURNZD is justified.
Meanwhile, RBNZ are likely pleased to see the Kiwi Dollar move lower, although it is the TWI (trade weighted index) which needs to be monitored. Whilst the TWI has moved lower in recent weeks, it remains above levels they are comfortable with, meaning RBNZ are likely to retain their easing bias and reference to the high NZD in their statements. With potential for further easing on the table from RBNZ and the hope of a less dovish Draghi in the coming months, then the argument for a higher EURNZD remains strong.
Matt Simpson | Senior Market Analyst
A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.