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NZDUSD Rebound Unravels as NZ Treasury Identifies Lower Bound for OCR

NZDUSD Rebound Unravels as NZ Treasury Identifies Lower Bound for OCR

2019-08-12 02:00:00
David Song, Currency Strategist
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New Zealand Dollar Talking Points

NZDUSD attempts to retrace the selloff following the Reserve Bank of New Zealand (RBNZ) meeting, but the ongoing trade dispute between the US and China may continue to drag on the exchange rate amid the weakening outlook for the Asia/Pacific region.

NZDUSD Rebound Unravels as NZ Treasury Identifies Lower Bound for OCR

NZDUSD struggles to retain the rebound from the monthly-low (0.62377) even though US President Donald Trump tweets “China wants to make a deal so badly,” and little indications of an impending resolution may push the Reserve Bank of New Zealand (RBNZ) to further insulate the economy as China weakens the Yuan reference rate.

The threat of a currency war may push the RBNZ to endorse a dovish forward guidance ahead of the next meeting on September 24, but it remains to be seen if Governor Adrian Orr and Co. will deliver another rate cut after reducing the official cash rate (OCR) by 50bp in August.

Image of RBNZ interest rate decision

Nevertheless, recent remarks from the RBNZ suggest the central bank will stick to its rate easing cycle as Deputy Governor Geoff Bascand insists that “there is some probability we’ll have to go lower,” and the central bank may continue to push monetary policy into unchartered territory as economic activity needs “to be faster than potential” for the board to achieve its dual mandate.

At the same time, Bloomberg News released a draft paper from New Zealand’s Treasury Department that was acquired through the Official Information Act, with the note stating that “the limit of the OCR, before corporate bond rates reach zero, is between -0.2% and -0.35%.”

With that said, a growing number of New Zealand officials may endorse a lower trajectory for the cash rate amid the threat of a US-China trade war, and NZDUSD stands at risk of facing a more bearish fate over the near-term as the RBNZ keeps the door open to implement lower interest rates.

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NZD/USD Rate Daily Chart

Image of nzdusd daily chart
  • The break of the May-low (0.6482) casts a bearish outlook for NZDUSD, with the Relative Strength Index (RSI) highlighting a similar dynamic as the oscillator snaps the upward trend from earlier this year.
  • More recently, the rebound from the 2019-low (0.6377) appears to have stalled as NZDUSD struggles to extend the recent series of higher highs and lows, with the downside targets coming back on the radar amid the string of failed attempts to trade back above the former-support zone around 0.6490 (50% expansion) to 0.6520 (100% expansion).
  • Need a break/close below the Fibonacci overlap around 0.6370 (50% retracement) to 0.6430 (78.6% expansion) to open up the 0.6310 (100% expansion) hurdle, with the next area of interest coming in around 0.6180 (161.8% expansion) to 0.6210 (78.6% expansion).
  • Will keep a close eye on the RSI as it appears to be slipping back into oversold territory, with a break below 30 raising the risk for a further decline in the exchange rate as the bearish momentum reasserts itself.

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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.

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