“Strong divergence warns of a potential near-term top in NZD/CHF..” Technical Analysis & Chart @JEliasof fx

Jonathan Eliasof

Strong divergence warns of a potential near-term top in NZD/CHF as it approaches channel resistance for the sixth time in just as many months.  While stochastics show plenty of room to run, the kiwi looks weak against the dollar following a massive short squeeze early in the week.  We’d argue that kiwi strength is more a reflection of short covering rather than actual demand.  As such, high beta/CHF may have a difficult time sustaining recent gains with AUD and NZD-specific drivers in the rear view mirror.

While there’s a possibility of NZD/CHF rising slightly above trendline resistance, we expect gains to be capped ahead of the 78.6% fib at .7900.  We will look to go short once a [daily] red close is achieved; until then, we will gauge the reaction from Thursday’s ECB meeting as any hint of future rate cuts could send EUR/USD lower, in turn providing xxx/CHF with a bit of lift.

Should the dollar gain traction on the back of a better than expected payrolls figure, we could see NZD/CHF consolidate before deciding on its next move.  Any sort of meaningful flight to safety could also have a negative effect on risk-correlated currencies like AUD and NZD, assuming the driver isn’t eurocentric.  Next week’s RBNZ meeting might be a non-event, but traders should pay close attention for any sort of dovish slant, especially in light of recent comments by RBNZ Governor Wheeler with respect to the kiwi being overvalued. 

We’ve also heard rumors that the RBNZ has been actively selling NZD/USD above .8450 in recent months, which could help put a ceiling on the kiwi in the near-term.  While this bodes well for NZD bears, we shouldn’t overlook a potentially dovish ECB, which could send kiwi/franc higher one last time before selling kicks in.  We expect the franc to underperform throughout most of 2013, but an equally heavy kiwi should allow for [intermittent] periods of CHF strength as NZD/CHF remains range-bound.