Currency Pair: Bearish NZD/USD
Expertise: Fundamental and Technical
Average Time Frame: One Month
Join DailyFX analysts for live coverage of Thursday’s Reserve Bank of New Zealand interest rate decision.
The New Zealand Dollar continues to weaken against its generally stronger US cousin and there seems little hope that this process will reverse anytime soon.
The Reserve Bank of New Zealand will set interest rates for May on Thursday. The market doesn’t think the current, record-low 1.75% Official Cash Rate will be going anywhere this month. Indeed it may not go anywhere for for many months to come if inflation doesn’t pick up.
What’s more, the RBNZ has now accepted a new mandate to officially include consideration of full employment in its policy deliberations. This may not pose much of an immediate problem for it. NZ unemployment is reasonably low. However, the new mandate may result in lower rates for longer over time.
NZD/USD broke out of the steep downtrend which had been in place since mid April, but seems simply to have replaced it with a shallower one.
That downtrend is now flirting with the NZD0.6934 level which represents 76.4% Fibonacci retracement of the rise from November 2017’s lows to the highs of this year.
Given the lack of obvious fundamental catalysts for a turn in sentiment toward the kiwi over the next month or so, it seems sensible to play for a continuation of that downtrend, targeting complete retracement of that rise. That would mean a fall down to NZD0.6794.
Risks to the trade include any general rethink about the US Dollar’s strength, but such a thing seems unlikely in the near-term as the Federal Reserve still seems keen on tightening monetary policy if it can. It is thought very probable indeed that US rates will go up in June.
The RBNZ may of course strike a less-dovish tone this week too but, again, this doesn’t seem very likely.
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--- Written by David Cottle, DailyFX Research
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