NZD/USD in Focus – 72 or 74?

NZD/USD in Focus – 72 or 74?

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NZD/USD in Focus – 72 or 74?

The big focus tonight is on the Reserve Bank of New Zealand’s monetary policy announcement. We published our outlook yesterday and will reiterate it today. The RBNZ is widely expected to leave interest rates unchanged but the sell-off in the New Zealand dollar over the past few days tells us that investors are positioning for less hawkishness from the central bank. When the RBNZ last met in June, they overlooked the 4% rise in NZD/USD between the last 2 monetary policy meetings and chose to say the “lower currency would help rebalance growth.” They were able to do so because the New Zealand economy actually performed better between May and June. However since then as shown in the following table, there has been significant deterioration in New Zealand’s economy and on top of that NZD/USD rose another 3 cents before peaking in late July. For all of these reasons, we believe that the Reserve Bank will be less optimistic but at the same time worries about a strong currency is assured as we don’t need to reach far for reasons that could disappoint investors who have been selling the New Zealand dollar before the policy announcement. The New Zealand dollar is trading not far from where it was at the last meeting against the U.S. dollar and is actually 3.8% lower against the currency of its most important trading partner, the Australian dollar.

Technically, NZD/USD is hovering above support at 73 cents. If the RBNZ is dovish it will blow right past that and head to the 38.2% Fibonacci retracement of the May to July rally at 0.7275. If they continue to look past the weakness in the economy and express optimism about the country’s outlook, its back to 74 cents for the pair.

NZD/USD to 72 Cents?

NZD/USD to 72 Cents?

Chart Of The Day

NZD/USD to 72 Cents?

The New Zealand dollar has been surprisingly strong despite weaker service sector activity and dovish comments from the Reserve Bank of New Zealand. Last Monday RBNZ Assistant Governor McDermott said inflation is expected to be low and therefore further policy easing will be required. Yet NZD was the strongest performing currency today because investors are skeptical about the central bank’s willingness to lower rates at a time when manufacturing activity is growing at its fastest pace since January. In other words the CPI report could reshape expectations for RBNZ easing. If CPI growth slows to 0.1% from 0.4% like economists expect, the central bank’s concerns will be justified and NZD/USD will give up its recent gains quickly. However if CPI grows by 0.2% or more, we may only see a modest decline in NZD and if year over year growth holds steady at 0.4% or better yet accelerates, NZD/USD could make a run for 72 cents.

Technically, NZD/USD certainly appears poised to make a run for 72 cents. There’s no major resistance in this latest rally until 0.7170 and the main level to watch is actually 0.72 cents because that’s where the 20-day SMA and 38.2% Fibonnaci retracement 2014 to 2015 sell-off converge. If NZD/USD drops below Monday and Friday’s low near 0.7078 then 70 cents becomes the new target.