As the RBNZ meeting approaches, Kiwi has been boosted today, mainly driven by the Chinese stocks rise and the gradual increase of Oil prices. The Earnings are trumping trade jitters and Chinese stocks rebounded as trade tensions saw government support underpins confidence. Higher Oil prices are underpinning energy producers. Overall however, the New Zealand Dollar remains one of the weakest currencies in 2018 against all the major currencies except the Pound, despite today’s rebound.
Concerns that the deepening Sino-US trade dispute will negatively impact the Chinese economy, which is the biggest market for both Australian and New Zealand exports, have seen market participants demand a higher discount for the antipodean currencies, i.e. AUD, NZD. Actually there are good reasons to expect the trade confrontation to worsen.
The Trump administration is presently mulling a tariff hike on $200 bln of Chinese imports, and it’s not unreasonable to assume that these will be confirmed later this month or early next given the facts that Trump perceives the advantage in the trade war to be his (the massive U.S. trade deficit with China), the US economy is motoring, and that Trump, such as his proclivities are, will want to look strong before his base going into the midterm elections in November. It’s also reasonable to assume that Beijing will not yield, and play the long game, waiting to see how the chips fall for Trump at the November elections.
On the other hand, at the RBNZ meeting is unlikely to see any changes, something that would leave the NZD dollar in the same direction. At the June meeting, the RBNZ held rates at 1.75% and opened the door to a rate cut if necessary. We don’t think they will need to trim rates — the next move will be a rate increase — but wide expectations is for steady policy well into next year. Hence no change is the expected outcome from the meeting this week.
NZDUSD’s low is 0.6687, which is the lowest level seen since June 2016, with key Resistance area at 0.6779-0.6850. This Resistance area holds within the Head and Shoulders trend-line and the 50-day SMA. As can be seen in the figure below, the Head and Shoulders bearish pattern was confirmed in the weekly chart, on the price movement below 0.6779 level, which also coincides with the 20-day SMA.
The pair has been seen ranging below 50-day SMA within the 0.6713-0.6850 area since the beginning of July, unable to show any gains above it. This keeps the overall outlook strongly to the bearish side, with immediate Support at the bottom of the range, at 0.6713. Hence as long as the trade tensions between US and China ratchet higher along with lack of any change to RBNZ monetary policy on Thursday, NZDUSD is expected to remain in the “trend-following” mode.
The initial Support holds at 2-week low, at 0.6713, while on the break of it, the next Support area comes at 0.6675-0.6687 (May 2016 low and 2-year low). Further losses could trigger the movement towards the lower weekly Bollinger Bands line at the round 0.6600 level.
To the upside so far any swing higher suggests another selling opportunity. Only a break above 0.6850 and more precisely above 0.6965 (20-week SMA and 38.2% Fib. level since 2018 peak), could suggest the end of this long term decline and the retest of June’s peak at 0.7060.
Nevertheless, intraday, the pair’s failure to develop an upside move up to 0.6779 Resistance suggests that bears remain in control. The pair failed for 4 consecutive hourly sessions, to move above today’s high at 0.6754. If it manages to break above day’s peak, then it could retest the latest swing high at 0.6765 last Friday. Support comes at 50-period SMA at 0.6740.
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