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NZDUSD Rate Eyes 2019 Low Ahead of RBNZ Amid Threat of Currency War

NZDUSD Rate Eyes 2019 Low Ahead of RBNZ Amid Threat of Currency War

David Song,
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New Zealand Dollar Talking Points

NZDUSD trades near the 2019-low (0.6482) as the escalating trade dispute between the US and Chinaputs pressure on the Reserve Bank of New Zealand (RBNZ) to implement lower interest rates.

NZDUSD Rate Eyes 2019 Low Ahead of RBNZ Amid Threat of Currency War

The People’s Bank of China’s (PBOC) decision to weaken the Yuan reference rate comes in response to the new round of US tariffs, and the threat of a currency war may push the RBNZ to insulate the New Zealand economy as “members agreed that more support from monetary policy was likely to be necessary.”

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The RBNZ is expected to cut the official cash rate (OCR) to a fresh record low of 1.25% at the upcoming meeting on August 7, and Governor Adrian Orr and Co. may continue to push monetary policy into unchartered territory amid the weakening outlook for the Asia/Pacific region.

Image of RBNZ official cash rate

In turn, the New Zealand Dollar stands at risk of facing a more bearish fate especially if the RBNZ endorses a dovish forward guidance for monetary policy, but it remains to be seen if the central bank will implement lower interest rates throughout the remainder of the year as “domestic GDP growth had held up more than projected in the March 2019 quarter.”

With that said, a less dovish policy statement may curb the recent decline in NZDUSD, and the RBNZ may take a more reactionary approach in managing monetary policy as “several central banks are now expected to ease monetary policy to support demand.”

Keep in mind, the broader outlook for NZDUSD remains mixed as the decline from the March-high (0.6939) fails to spur a run at the 2019-low (0.6482), but recent developments in the Relative Strength Index (RSI) warn of a further decline in the exchange rate as the oscillator snaps the bullish formation from earlier this year.

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NZD/USD Rate Daily Chart

Image of nzdusd daily chart
  • The 2019-low (0.6482) sits on the radar for NZDUSD as the exchange rate extends the series of lower highs and lows from the previous week, while the Relative Strength Index (RSI) snaps the bullish formation from earlier this year and approaches oversold territory.
  • Need a break/close below the Fibonacci overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion) to open up the next downside hurdle around 0.6370 (50% retracement) to 0.6430 (78.6% expansion), which largely lines up with the 2018-low (0.6424).
  • However, another failed attempt to break/close below the support zone around 0.6490 (50% expansion) to 0.6520 (100% expansion) may generate a near-term rebound in NZDUSD, with the first region of interest coming in around 0.6600 (23.6% retracement) to 0.6630 (78.6% expansion) followed by the 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion) area.

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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