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  • NZD/USD has been in a reversal of the overnight supply from late London 0.6809 highs that met 0.6771 NY session lows before correcting back to a recent high of 0.6794 ahead of The Reserve Bank of New Zealand’s bi-annual Financial Stability Report, (FSR).
  • NZD/USD popped a fresh five minute low to 0.6783 on the release of the FSR but was bought back a few pips to 0.6789. Clearly, the RBNZ is on hold for the foreseeable future, and external themes in the markets are taking priority as we head to key risk events that include Powell speaking tonight as we build up to the Xi/Trump summit.  

NZD/USD has been on the backfoot since mid-November, capped at a high of 0.6883, meeting the 200-D SMA at 0.6871 and some 50 pips shy of the 50% Fibo retracement of the 2018 range – Instead,   meeting the 28/29th May lows as a resistance.  

A number of factors are in play with respect to the price action of late, and while there have been some pretty impressive upside economic surprises domestically from New Zealand, (such as jobs/CPI and GDP), the “new” RBNZ is has been less hawkish than the “old” and the RBNZ’s shift to a dual mandate and new Governor had resulted in a less hawkish institution than the previous. That, coupled with a resurgence in the greenback due to heightened angst over global growth prospects and trade, (recently noted by ECB’s Draghi in for not of EU Parliament, sending the DXY higher), along with a projected slowdown in China, has clipped the bird’s wings. (The bird now trades heavily and is on the defensive below the 38.25 Fibo of 2018’s range).

With respect to the RBNZ, it has said that it is not going to lift the OCR any time soon, and if that means that both inflation and employment overshoot their targets, then so be it, as analysts at Westpac recently pointed out:

“Accordingly, our economists have altered our OCR forecast, now expecting the OCR to start rising in November 2020 (previously May 2020) and to rise more slowly than previously forecast. Markets have pushed OIS rates higher in reaction to strong economic data over the past few months, but we think that is a mistake,” the analysts argued, adding, “The RBNZ has no intention of hiking in 2019, even if the data is strong.”

Risks ahead:

While we build up towards the Xi/Trump summit at the end of the week, the immediate attention is on the Fed. Federal Reserve’s Powell will be speaking on the economy tonight as he makes an appearance at the Economic Club of New York. There was a recent wobble in US yields and the dollar on mounting sentiment that the Fed will be turning less hawkish as it nears its neutral target.   Also, the greenback was weighted lower following such critics as President Donald Trump, who has been calling for the Fed to slow its pace of rate hikes concerned about how they may jeopardise the rate at which the US and world economy can continue to grow. Should there be such a rhetoric from the governor of the Federal Reserve, that could take the dollar down a notch or two that has otherwise been making good ground across the board; The DXY is now trading way above the 61.8% Fibo of the mid-Nov decline to recent lows at 96.04, located at 97.06 (Key support). In overnight price action, the DXY pierced the 78.6% Fibo and rallied to a North American high of 97.50.

However, for the antipodeans, the Xi and Trump discord is arguably more significant. Friday’s slated table-top and face-to-face meeting where the leaders of the two most economically powerful nations of the world are expected to thrash it out over trade and hopefully find a solution to their dispute – or at least, lay out a framework for negotiations concerning trade for the near future – is key.

The positive sentiment there will give both the Aussie and the Kiwi a lift and likely strip out the trade war trade from underneath the greenback. For sure, it will give risk assets a revamped appeal and likely lay the foundations for an end-of-year and much-needed rally in global stock markets – (US indexes are now more than 10% down from their all-time highs which puts them in corrective territory).  

NZD/USD levels

  • Support 0.6700.
  • Resistance 0.6890.

Strong economic data in recent weeks had given flight to the bird where the 0.68 handle was accomplished, and bulls managed to get through the 38.2% retracement fibo (at 0.6810) of the 2018 sell-off from 0.7441 highs to 0.6427 2018 lows. However, bulls failed to get past the 0.6880 area guarding 0.6929, as the 50% fibo of the 2018 range. The pair now finds itself capped by the 10-D SMA at 0.6809 converging with the 38.2% fibo and now bears have eyes on the 21-D SMA at 0.6741guarding 0.6680.