New Zealand Dollar Continues to Lead the Majors, Canadian Dollar Tumbles Lower

The New Zealand dollar pared the overnight advance against the greenback, but remains the best-performing currency on Wednesday, and the exchange rate may trend lower throughout the U.S. trade as investors scale back their appetite for risk. The NZD/USD is slightly lower on the day after rising to a high of 0.7192 during the overnight trade, and has moved only 53% of its ATR after holding a 47pip range. As the kiwi-dollar fails to retrace the decline from earlier this month, the pair is likely to maintain the downward trend from the October high as the 50-Day SMA (0.7250) looks poised to cross below the 100-Day SMA at 0.7165. Nevertheless, as the Reserve Bank of New Zealand pledges to normalize policy during the middle of 2010, the rebound in interest rate expectations may keep the NZD/USD within a broad range throughout the first-half of the following year as investors weigh the outlook for future policy.

The Canadian dollar extended the decline from the previous day, with the exchange rate rising to a high of 1.0578, and the currency may face increased selling pressures going into the Asian session as investors lower their appetite for risk. The USD/CAD is 120pips higher from the open after moving nearly 136% of its average true range, and the sharp rally certainly looks to be overbought as the 30-minute RSI jumps to 76. As a result, we may see the dollar-loonie pull back and fill-in the gap from the 240-SMA at 1.0469 as the advance stalls ahead of the 50-Day SMA at 1.0584. Meanwhile, as the Bank of Canada holds a dovish outlook for inflation, the USD/CAD may continue to hold a broad range going forward, but a shift in interest rate expectations is likely to lead to a major breakout as market participants weigh the prospects for a change in monetary policy.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com