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NZD/USD Prices May Fall as NAFTA Clears & Fed Rate Hike Bets Rise

NZD/USD Prices May Fall as NAFTA Clears & Fed Rate Hike Bets Rise

2018-08-29 04:15:00
Daniel Dubrovsky, Analyst
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NZD/USD Trading Strategy: Bearish

  • The New Zealand Dollar may keep gaining in the interim as NAFTA progress lifts stocks
  • Once event risk passes, Fed rate hike bets could increase leaving NZD/USD vulnerable
  • NZD/USD upside momentum seems to be fading, a reversal may open the door to a short

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NZD/USD Fundamental Bearish Argument

An improvement in market mood amidst progress on NAFTA talks between the US and Mexico has helped push the pro-risk New Zealand Dollar higher against its US counterpart. Canada was at first left out of negotiations, but now it is actively discussing the terms of the new trade pact between its North American neighbors. Recently, it was reported readying to make dairy concessions for compromises on other matters.

An accord that brings the countries closer out of a potential trade war will likely fuel more upside gains in stocks. But once this settles into the markets, the focus for NZD/USD could turn back to interest rate fundamentals. Coincidentally, if NAFTA talks prevail and lowers the risk for global growth, then the Fedcould be given more scope to raise rates in the future.

Overnight index swaps aren’t fully pricing in an additional Fed rate hike by December. This could open the door to more US Dollar gains in the near-term as those bets come in-line with the central bank’s outlook. Meanwhile, the RBNZ is relatively dovish and it isn’t anticipating to change rates until into 2020. With that in mind, fundamental speaking this offers an argument for NZD/USD to decline once NAFTA clears.

NZD/USD Technical Analysis – Upside Momentum Fading

At the moment, it would be best to stand aside until the event risk passes. The technicals in NZD/USD suggest it is still in an uptrend when looking at the shorter term. On the daily chart, the New Zealand Dollar appears to be pushing above the descending resistance line from June. A daily close above that and 0.6725 (July support now resistance) could open the door for the pair to test 0.6851 afterwards.

NZD/USD Daily Chart

Chart created in TradingView

However, zooming in on the four-hour interval shows that upside momentum is fading via negative RSI divergence. While this does not guarantee that prices will turn lower next, it should warrant caution. The New Zealand Dollar could also consolidate against its US cousin as a result. With that in mind, we will be actively watching this pair for potential selling opportunities in the near-term.

NZD/USD 4-Hour Chart

Chart created in TradingView

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--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

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

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