NZD Boosted by Risk-on Sentiment But Weakness Remains

Talking Points:

• The RBNZ will be closely watching the recent Kiwi uptick.
• The latest quarterly producer price data was mixed.
• The downside still looks the path of least resistance for NZD/USD.

Fundamental Forecast for NZD: Neutral

We remain neutral on the New Zealand - with a bias to sell any strong rallies – despite the Kiwi gaining on the back of improving market sentiment. The high yielding currency normally benefits when markets turn ‘risk-on’ and the recent easing of tensions between the US and North Korea saw NZD buyers return. The RBNZ however will be watching the currency closely and has in the past said that it would act if needed to contain any unwanted currency appreciation.

The latest PPI figures showed a mixed message with input costs rising by 1.4%, compared to last quarter’s 0.8%, while output costs rose by 1.3% against a prior quarter’s 1.4%.

A look at the chart below shows the NZD/USD forming a head and shoulders pattern which normally points to the market turning lower. Resistance is likely to be found around the 0.7360 level ahead of the 23.6% Fibonacci retracement level at 0.7383.

Retail trader data shows a ratio of traders short to long at 2.04 to 1. In fact, traders have remained net-short since May 24 when NZDUSD traded near 0.68435; price has moved 7.0% higher since then. We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZD/USD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed NZD/USD trading bias and leaves us on the side-lines for now.

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--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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