NZD/USD made extraordinary gains despite signs of strengthening in the US economy from the positive non-farm payrolls report. This may be attributed to two facts:
1) Although extraordinary, the June report was an outlier, especially when compared to the disastrous May report, and may not reflect actual US economic conditions.
2) The New Zealand central bank (RBNZ) decided to maintain interest rates at 2.25%.
Despite that, I believe NZD/USD will be heading down. First, the fundamentals:
- The RBNZ decision was already expected. Moreover, in his statement, RBNZ governor Graeme Wheeler made it very clear that the exchange rate is too high, and rate cuts are not out of table:
"The exchange rate is higher than appropriate given New Zealand’s low export commodity prices. Together with weak overseas inflation, this is holding down tradables inflation. A lower New Zealand dollar would raise tradables inflation and assist the tradables sector."
"Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data. "
- Is this a cue that there will be indirect interventions on the exchange rate? Maybe.
- Though the US payrolls report may not indicate a real strengthening of the American economy, it at least does not shows a weakening of conditions, so it does not justify a rise in the exchange rate.
Now, for the technical analysis:
- At the moment NZD/USD has hit a multi-week resistance level, and it doesn't seem likely that is going to break it. The last time this happened was during the crazy Brexit volatily period, and it quickly fell after that.
- The relative volatility (using 10 periods) is almost 80, indicating a high probability of a drop.
- The MACD itself has reached a resistance, so we may see a drop from here on, maybe slowly at first, but gradually gaining momentum.
My setup will be the following:
1) Although extraordinary, the June report was an outlier, especially when compared to the disastrous May report, and may not reflect actual US economic conditions.
2) The New Zealand central bank (RBNZ) decided to maintain interest rates at 2.25%.
Despite that, I believe NZD/USD will be heading down. First, the fundamentals:
- The RBNZ decision was already expected. Moreover, in his statement, RBNZ governor Graeme Wheeler made it very clear that the exchange rate is too high, and rate cuts are not out of table:
"The exchange rate is higher than appropriate given New Zealand’s low export commodity prices. Together with weak overseas inflation, this is holding down tradables inflation. A lower New Zealand dollar would raise tradables inflation and assist the tradables sector."
"Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data. "
- Is this a cue that there will be indirect interventions on the exchange rate? Maybe.
- Though the US payrolls report may not indicate a real strengthening of the American economy, it at least does not shows a weakening of conditions, so it does not justify a rise in the exchange rate.
Now, for the technical analysis:
- At the moment NZD/USD has hit a multi-week resistance level, and it doesn't seem likely that is going to break it. The last time this happened was during the crazy Brexit volatily period, and it quickly fell after that.
- The relative volatility (using 10 periods) is almost 80, indicating a high probability of a drop.
- The MACD itself has reached a resistance, so we may see a drop from here on, maybe slowly at first, but gradually gaining momentum.
My setup will be the following:
- Sell Breakout of secondary resistance (about 0.7270)
- Stop Loss at 0.7311 (41 pips loss)
- Cover if any fib level is strongly rejected (a trailing stop of 30 pips might do).
- Long-term Target: 0.7115 (145 pips gain)