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NZD/USD Drops Sharply Towards Critical Support
A continuation higher in the Greenback has weighed heavy on NZD/USD with the Kiwi Dollar posting the largest losses among the majors shortly ahead of the European close. The currency pair is down 1% on the day, and nearing major support that will ultimately provide a clear near to medium-term directional bias for the pair.
The US Dollar index (DXY) extended higher to completely erase losses from Friday’s US Jobs report, briefly posting a seven-month high. Resistance at 97.35 reflects the highest close in July, the index was last seen trading at 97.49 for a gain of 0.63%. A sustained break above 97.35 in the form of a daily close would further fuel the current rally, putting the trend in NZD/USD from the start of the year at risk.
NZD/USD has been correcting lower from highs posted in early September, with momentum picking up last week following a technical break. The broader outlook for the pair, however, continues to point an uptrend.
On a daily chart, NZD/USD remains above a rising channel and has been posting a succession of higher highs and higher lows from the start of the year. With strong momentum behind the current decline, there is a good possibility that the pair will test strong support this week.
Support in the pair is seen at 0.6991. The level had held the exchange rate higher in mid-June, late June and once again in late July. With the close proximity of the level to the psychological 0.7000 handle and the lower line of the rising channel, the currency pair stands to provide a clear reversal signal from the broader trend throughout 2016, if a technical break materializes.
Similar to last week, the Dollar has been strengthening early in the week, with a relatively light economic calendar. Recent communication from the Federal Reserve has provided a clear viewpoint of the central bank’s stance on monetary policy. With the US presidential election nearing, the Greenback stands to fluctuate based on public perception and speculation of who the new leader of the United States will be.
Risk sentiment has played a role in the Kiwi Dollar decline today. Equity markets in the United States are seen moving lower with the S&P 500 posting a gap down at the open, followed by a steady stream of selling. The index was seen trading at 2,140 ahead of the lunch break, for a notable loss of 1.08%.
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New Zealand - Food Price index for September: -0.9% m/m (prior +1.3)
New Zealand data from earlier today:
New Zealand - Services PMI (September): 54.1 (prior 57.9)
September BNZ - BusinessNZ Performance of Services Index from NZ
New Zealand Q3 CPI: 0.2% q/q (vs. expected 0.0%)
Q3 inflation data from New Zealand
Westpac likes the NZD: "Buying NZD/CHF thus seems to be the safer bet"
From the latest Westpac "High Conviction FX Trades"
AUD and NZD ... our model, macro and technical signals pushing strongly back in their favour
Aussie's domestic fundamentals are strong
New Zealand:
Westpac's model "goes long NZD in a big way, +26.8% of the portfolio"
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In brief, the banks "High Conviction Trades" blends recommendations from our G10 FX quant model, macro analysis and technical analysis.New Zealand September Net Migration: +6340 (prior +5600)
Immigration to NZ is said to be a driver of house price inflation
NZD/USD forecast for the week of October 24, 2016
The New Zealand dollar initially tried to rally during the course of the week, but found the area above the 0.72 level be far too resistive. By doing that, the market turned right back around to form a shooting star. Ultimately, if we can break down below the uptrend line, it’s likely that we could reach towards the 0.70 level below, which I think is somewhat supportive. If we break down below there, then this market could really start to break down. Alternately, if we broke above the top of the shooting star it could be a very bullish sign and have buyers returning.
New Zealand Dollar Exchange Rate: Forecasted Lower Against US Dollar (NOT Pound Sterling) Say BNZ Analysts
Latest predictions and NZ Dollar (NZD rate forecasts for the near, medium and long-term outlooks
Inflation shows no signs of improving. The consumer price index in the third quarter rose by a dismal 0.2%, compared to the 0.4% rise in the previous quarter. This is the eighth straight quarter that the inflation has remained below the RBNZ’s target band of 1-3%.
While the housing-related prices came in higher, lower petrol prices were a dampener.
However, what gives confidence to the economists is that the increase in the CPI is 0.8% annually, if petrol prices are excluded.
Economists expect the RBNZ Governor Graeme Wheeler to cut the official cash rate in the next review on November 10. The futures are pricing in an 80% probability of a rate cut.
One OCR cut is likely
In a recent speech, RBNZ Assistant Governor John McDermott said the bank's “current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range”.
Reasons for low inflation
McDermott said that the central bank’s focus is the medium-term inflation, it doesn’t focus on the near term figures.
The sharp drop in oil prices and one-off reductions in the government charges have led to low inflation in the near-term and these will pass out of annual figures.
Thereafter, inflation is likely to pick up to the bottom of the RBNZ’s target range in the December quarter “as previous petrol price declines drop out of the annual calculations and housing-related goods and services prices continue to increase strongly.”
Secondly, the global recovery has been weak, even with the massive monetary policy support. Global demand is weak, which has led to soft prices of internationally traded goods. Hence, import prices in New Zealand have remained low. The RBNZ cannot control these issues.
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RBNZ will be publishing interest rate projections from November
The Reserve Bank of New Zealand announcing they are to replace their projections of the 90-day bill yield with projections for the Official Cash Rate
NZ data - International tourism’s contribution to total exports has surpassed dairy
Data from Statistics New Zealand today on tourism spending in the counrty