Short NZD/USD Again as 2018 Downtrend May Resume after Fed Hike
NZD/USD Trading Strategy: Short Again at 0.6788
- Fed hiked rates, left door open to 2 in 2019 as stocks fell. NZ GDP data miss sunk NZD/USD
- New Zealand Dollar may catch up with increasingly less hawkish RBNZ monetary policy bets
- NZD/USD short at 0.6788 back in play after 2018 dominant downtrend appears to be resuming
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About a month ago, the fundamental and technical scenario in NZD/USD resulted in me shorting at 0.6788. However, due to the potential for upside gains on the G20 Leaders’ Summit, the trade was exited and I cut my losses short in order to re-enter a new selling position down the road. Prices ended up moving higher as anticipated, but since then they have fallen. The time for re-entry has come.
NZD/USD Fundamental Bearish Argument
Fundamentally, my bearish NZD/USD argument remains mostly unchanged. The Fed is considerably more hawkish than its New Zealand counterpart. That was affirmed after December’s interest rate announcement. In recent months, the markets became skeptical to the point that they didn’t confidently envision one Fed rate hike in 2019.
That was cleared up when the Federal Reserve left the door open to two hikes in 2019, largely surpassing market expectations. The US Dollar swiftly rose as the S&P 500 tumbled to its lowest in 15 months. Consequently, the pro-risk New Zealand Dollar tumbled as market mood deteriorated. This is largely because traders, in an effort to preserve capital, unwound their carry trade positions which entailed selling NZD.
But what about the RBNZ? The central bank has not had a rate decision since November 7th and the next one is not until February 13th next year. Keep in mind that the Reserve Bank of New Zealand still left the door open to a rate cut down the road. In addition, the chart below shows that the markets have become increasingly skeptical that we may get one rate hike from the central bank by the end of the first quarter of 2020.
Do note the increasing divergence between NZD/USD and RBNZ rate hike projections above. If the central bank is indeed not hiking in the near-term, that leaves plenty of room for Kiwi Dollar to catch up with reality (decline). Recent GDP data showed that New Zealand’s economy slowed to its weakest pace in just about 5 years, further reducing prospects of a rate hike in the near-term. Stocks and thus NZD also remain vulnerable to prospects of tighter credit conditions in the US which have key influences in global financial transactions.
NZD/USD Technical Analysis – Downtrend Resuming?
Technically, NZD/USD appears to be resuming its dominant downtrend in 2018. Since the break under the rising trend line from late October, the New Zealand Dollar has extended its losses against the US Dollar. With that in mind, I opted to re-enter short NZD/USD at my original entry point at 0.6756. However, at the time of the trade execution, prices were above my entry and I got in ata better price.
I am still using the November 16th high as my daily close stop at 0.6883. Climbing through that may signal uptrend resumption. The target of this trade remains the September 11th low at 0.6501. However, I have lowered my risk-reward ratio to 2-to-1 given the timing of this setup and where prices were when I entered short. 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
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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.