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EUR/NZD – Upside Breakout, 1.72 Next?
Euro is one of this week’s best performing currencies. Compared to others, its pullback on Friday was modest and even with the decline EUR/USD is flat for the week while up strongly versus the commodity currencies including the New Zealand dollar. The Eurozone’s economy is recovering and the effect of a strong euro on inflation has been limited. As a result, Eurozone policymakers have become more tolerant of the rising currency and more eager to end asset purchases. With very little Eurozone data in the coming week to threaten the currency’s positive outlook we see further gains in the currency. Meanwhile the New Zealand dollar is at risk of additional losses. On Friday, it experienced its largest one day decline since October and such a strong sell-off typically has continuation. The RBNZ meets next week and since the last meeting, the New Zealand dollar appreciated 5.5% versus the greenback and 2% versus the Australian dollar. Data has been softer with retail sales growth slowing materially, manufacturing activity easing, business confidence falling and inflation slowing. We believe the risk is to the downside as the central bank could opt to talk down the currency.
Technically, EUR/NZD broke out of its month long consolidation and ending the day above the 50-day SMA for the first time since mid-December. There’s some mild resistance near 1.7065 (the Oct 31, Dec 12, 20 high) but once that level is broken, there’s no major resistance until 1.72.