Short NZD/USD, Support Taken Out. Fed, RBNZ, Stocks Underpin Trade
NZD/USD Trading Strategy: Short at 0.6788
- Gains in the New Zealand Dollar may only be corrective, dominant downtrend may resume
- Fed is considerably more hawkish than the RBNZ, pro-risk NZD at risk to equities as well
- I am short NZD/USD at 0.6788 using a daily close stop above 0.6883 and targeting 0.6501
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NZD/USD Fundamental Bearish Argument
Despite the S&P 500 tumbling about ten percent since October, the pro-risk New Zealand Dollar is up about 5.3 percent against its US counterpart. The backdrop for gains in the Kiwi Dollar has occurred amidst fading RBNZ rate cut expectations and diminished hawkish Fed bets. Consequentially, the highly liquid US Dollar struggled making upside progress on safe haven demand as the latter sapped its appeal.
Fundamentally, we may see December 2018 Fed rate hike bets get revived in the near-term. Fed funds futures are only giving that a 73.5% chance. The central bank has hinted time and time again that such an outcome is on the table. As markets realign with reality, it may accelerate the greenback higher against its major counterparts.
Granted, weakness in the US Dollar was accompanied with fading 2019 Fed rate hike expectations as well. Those diminished more aggressively than bets on the front-end. Commentary from Chair Jerome Powell and fellow colleagues about headwinds from global growth influenced that. But generally speaking, the markets are underpricing the central bank’s hawkishness which opens the door to USD gains down the road.
Meanwhile, the Reserve Bank of New Zealand is considerably less hawkish than its US counterpart. The central bank still left the door open to the possibility of a cut down the road in addition to a hike. Looking at the chart below, the markets are not pricing in one rate hike in 2019 (as implied by New Zealand 3-month bank bill futures).
2019 Implied RBNZ Rate Outlook
Based on the direction of where interest rates are going, I am fundamentally bearish NZD/USD. Furthermore, stock markets are still vulnerable to not just US monetary policy tightening, but also to slowing global growth, political uncertainty in Europe (Brexit, Italian budget concerns) and trade wars. It seems as though US China negotiations are not heading towards settlement. As a reminder, US is still on course to increase current 10% tariffs on roughly $200b in Chinese imports to 25% come 2019.
NZD/USD Technical Analysis – Downtrend Commencing?
With that in mind, we may see NZD/USD trade lower ahead. Recent price action warns that the dominant downtrend from April to the beginning of November may resume. The pair has broken under a near-term rising support line from earlier this month. This left the New Zealand Dollar at an attractive point from a risk-reward perspective to enter short at 0.6788.
In my setup, I am using 0.6883 (November 16th high) as my daily close stop. Getting above that may signal uptrend resumption and may warrant exiting this position. The target of this trade will be the September 11th low at 0.6501 which makes for a 3-to-1 risk-reward ratio. You may follow me on twitter @ddubrovskyFX for updates to this trade as well as on other potential setups.
NZD/USD Daily Chart
Chart created in TradingView
FX Trading Resources
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--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.