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NZ Dollar May Continue Heading Lower Against its US Counterpart

NZ Dollar May Continue Heading Lower Against its US Counterpart

Daniel Dubrovsky, Contributor

NZD/USD Trading Strategy: Pending Short at 0.7304

  • NZD/USD seems to be heading lower in a confined range following a double top formation
  • New Zealand Dollar may continue losing ground versus USD as yield advantage slowly dies
  • Prices are below optimal level for risk management, order placed to enter short at 0.7304

The New Zealand Dollar appears to be heading lower against its US counterpart in a confined range after the formation of a double top. Leading into the reversal, negative RSI divergence built up as the pair tried to push above horizontal resistance. This indicated waning momentum to the upside. The currency pair may continue heading lower as the New Zealand Dollar slowly becomes less favorable to the greenback.

This is because the Reserve Bank of New Zealand, which currently boasts the highest interest rate in the majors spectrum, seems likely to lose that coveted status in the near-term. The Fed is slowly catching up and is projected to overtake the RBNZ before year-end. It has already matched the RBA’s 1.50% main lending rate. With that in mind, this spells disaster for the New Zealand Dollar’s yield advantage relative to its US cousin and saps its appeal.

All the while, back at home the RBNZ seems to be in no rush to change rates following a rather disappointing local inflation report. In addition, the incoming governor Adrian Orr is poised to adopt proposals to broaden the mandate to include targeting full employment. This may further delay action here as policymakers get acquainted with the new updates.

With that in mind, entering short NZD/USD seems to be a compelling argument given the fundamental landscape. However, prices are below the minimum level needed to have at least a 2:1 risk-reward ratio. This is because the stop on this trade will be a daily close above 0.7346, just above the upper line of the confined range.

An order to enter short at 0.7304 has been placed to catch the minimum level needed to maintain optimal risk management. The target for this trade is 0.7221, just below the February 8th close.

Just started trading NZD/USD? Check out our beginners’ FX markets guide !

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.