Looking over our charts over the past week we noticed the impressive performance of NZD/JPY.

The New Zealand dollar was the best performer in the forex market last week as it gained 3.4% against the yen. The NZD found a bid after stronger-than-expected first quarter inflation and building hawkish expectations for the upcoming RBNZ meeting on April 29.

Economists expect no change in the benchmark lending rate but they may signal growing worries about inflation and higher rates to come.

Meanwhile, the JPY broke down against the CAD last week and is now in danger of breaking through strong resistance in USD/JPY. The longer-term technical picture against the NZD isn’t as bullish, however, so a pullback is possible. We will be keeping a close eye on 68.60, which we see as a pivot.

The New Zealand dollar traded slightly lower in a quiet day of forex trading today. The technical outlook remains lower as long as downtrend resistance remains unbroken. The outlook overall is partly constructive, however, due to Monday’s jump higher above resistance.

At the start of the week, the NZD rallied above resistance at 0.7177 but it wasn’t able to sustain the rally and closed well-below resistance and was lower on the session. Once again today, the NZD attempted to rally but it closed at a relatively unchanged level, generating a doji star pattern.

Though we can’t ignore the bullish breakout, we see the overall move as bearish, especially given the downtrend that has been in place since October.

For so long, the Australian dollar and New Zealand dollar have traded in near tandem. Now, there has been a huge divergence.

Today, the New Zealand dollar was among the worst-performing currencies while the Australian dollar and Canadian dollar were among the top gainers.

The story is also one of divergence. The Reserve Bank of Australia continues to raise interest rates while the Reserve Bank of New Zealand has held rates unchanged for more than six months.

It’s also clear that New Zealand’s central bank doesn’t want the NZD to appreciate and has made pains to emphasize that its economy isn’t as strong as Australia’s.

Technically, a divergence like the one were are seeing is often a reason to set up trades that benefit from mean reversion. We don’t think that’s the case here. We are emerging from the worst economic crisis in a generation. The recovery has been like a tide that lifts all boats. Now, the market is in a stage where it has grown more discriminating.

So far, the CAD and AUD look like winners. NZD may prove to be a winner as well but so far, it’s lagging and expect the performance of the NZD to continue to reflect that.

Looking through the charts today, NZD/USD jumped out at us. We noticed on Friday that the pair had formed a bearish englufing candle formation on the daily chart. That set off a drop on Monday but the losses were supported when NZD/USD fell to the 200-day moving average at 0.7002. That triggered a turnaround and now we have a bullish hammer formation.

Notice the support from the red 200-day moving average line as well as the big red candle a day earlier. The 100-day moving average (in blue) is also shown.

Overall, NZD/USD looks to be setting up for a big move. The market is locked between the 100-day and 200-day and when it breaks out it will likely test the trendlines shown on the chart.

Technically ,we like the downside in the medium term because the trend is clearly down. In the short term, however, the hammer pattern is bullish and we expect to see NZD/USD rally to 0.7100 initially. We would be a seller of strength, but not until 0.7150 with a stop at 0.7177.

The New Zealand dollar bulls haven’t had much to celebrate lately and with another slump on Monday, it’s not looking much better going forward.

The kiwi dollar has fallen below the 200-day moving average and it was the weakest performing major on Monday. Support levels continue to break down with 0.6685 clearly in the headlights and the potential for 0.6196 if that gives way.

We have added the Bollinger Bands to the chart to show that the pair is becoming somewhat oversold. It would be no surprise to see a re-test of 0.7000 but we would be better sellers on any bounce. This chart is as bearish as any one out there.

Yesterday, we talked about NZD/USD and warned about a retest of the critical uptrend that was broken on Nov. 27. We warned that we may see another retest of that trendline and that is exactly what happened today.

Bounced right off the trendline