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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.