NZD/USD Channel At Risk As Growth Signs Dim

The New Zealand dollar erased the majority of its gains on the week today weighed by dovish comments from RBNZ Governor Bollard and disappointing U.S. data. Weaker than expected manufacturing data and a rise in initial jobless claims above a half million, sparked a flight to safety, punishing the high yielder. The Kiwi started on the wrong foot following the central bank’s leaders remarks that despite an expected spike in consumer prices to 5.0%, given the country's fragile economic recovery, it is important that firms base their pricing decisions on low underlying inflation. The comments led to several economists changing their forecast for a rate hike at the September 15th policy meeting. Nevertheless, the majority of those polled in a Bloomberg survey still forecast that the central bank will raise rate by 25 bps. Meanwhile, overnight indeed swaps are pricing in a 40% chance of tightening by policy makers at the next meeting with a total of 55bps over the next year. The prospect of the yield spread between the New Zealand dollar and the greenback increasing may be enough to generate NZD/USD support keeping it within its current ascending channel. Adding to the case is the declining outlook for U.S. yields as the Fed has sent a clear signal that they will remain on hold for the remainder of the year.

Levels to Watch:

-Range Top: 0.7450 (Trend, Pivot)

-Range Bottom: 0.7050 (Trend, SMA)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Long: Place an entry at 0.7150-to confirm reversal
• Stop: Set the stop to 0.7050-range bottom
• Target: The first target is 0.7300

Trading Tip – A fundamental case could be made for continued NZD/USD weakness but given the convergence of support levels we have some confidence in this set-up. The 100-day SMA at 0.7058 has held as a barrier since July 7th and having withstood today’s bearish rally adds validity to it as a support level. Adding to the case is the rising trend line connecting the 6/8 low with the 8/16 low. The pair’s recent bounce from 0.7000 makes the psychological level a key pivot and a break below exposes considerable downside risks. Therefore, I am taking a conservative approach by waiting for confirmation of a reversal before taking a long position, as a dimming global growth outlook warns of potential weakness. Traders should stand ready to take advantage of a bearish break as downside potential could also yield significant profits.

Event Risk for New Zealand and U.S.

New Zealand – The upcoming RBNZ 2-year inflation forecast will present significant event risk for the New Zealand dollar as the pace of consumer prices will be the key determinant in deciding future monetary policy. Governor Bollard’s statements will put market participants on alert and the report should influence the outlook for interest rates. Signs that price growth is slower than expected could sink the high yielder with faster growth providing a boost.

U.S. – Following the disappointing Philly Fed reading all eyes will be on the August Richmond gauge to see if the manufacturing sector is experiencing broader weakness. Signs that the engine of growth is slowing could spark a flight to safety and weigh on the Kiwi. However, a dimming domestic growth picture could put a strain on the greenback as it has seen its negative correlation with fundamentals dissipate. Meanwhile, the July Durable goods orders report is a key gauge for the economy and a dip in demand of long –lasting goods could have a similar impact.