NZD/USD to 70 Cents?

NZD/USD to 70 Cents?

NZD/USD to 70 Cents?

The most important event risk on the calendar is the Reserve Bank of New Zealand’s monetary policy announcement. Like the BoE and RBA, the RBNZ is expected to cut interest rates by 25bp and if New Zealand also adopts a neutral stance, NZD will rise because 2% is still one of the most generous yields out there. However if they buck the trend and continue to maintain a strongly worded dovish stance, the currency could sink below 71 cents versus the U.S. dollar. While the RBNZ rate decision is singlehandedly the most important driver of NZD next week, the market’s appetite for U.S. dollars is also important. Friday’s unambiguously strong non-farm payrolls report sent the U.S. dollar soaring against all of the major currencies. Fed Fund futures went from pricing in a 57% chance of a 2016 rate hike yesterday to a 71.6% chance today. With 255K jobs added in the month of July and average hourly earnings growing by 0.3%, the U.S. economy shines compared to its peers. While we are still skeptical of the Fed’s commitment to raising interest rates this year, each piece of positive data will only harden the calls of the hawks who have already been saying that September is a live meeting and rates could rise this year. We highly doubt that a rate hike will come next month but the FOMC statement could be more optimistic, helping the dollar sustain its gains against all of the major currencies.

Technically, the recent rally in NZD/USD has failed below the 38.2% Fibonacci retracement of the 2014 to 2015 sell-off. This Fib level and the August high of 0.7256 are the 2 most important near term resistance levels for the pair. As long as NZD/USD holds below these levels, the path of least resistance is lower. Right now, the pair is finding support above the 20-day SMA and once that breaks the 50-day SMA and July 6 low of 0.7080 will serve as the next level of support. Beyond that, 70 is the target.

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