NZD/USD Rate Vulnerable to Reserve Bank of New Zealand (RBNZ) Rate Cut

New Zealand Dollar Talking Points

NZD/USD bounces back after five consecutive days of decline, but the exchange rate may exhibit a more bearish behavior as the Reserve Bank of New Zealand (RBNZ) is expected to lower the official cash rate (OCR) to a fresh record low.

NZD/USD Rate Vulnerable to Reserve Bank of New Zealand (RBNZ) Rate Cut

NZD/USD trades on a firmer footing after marking the longest losing streak since late July, and the exchange rate may stage a larger rebound ahead of the RBNZ meeting as it snaps the series of lower highs and lows from the previous week.

However, the RBNZ is expected to deliver a 25bp rate cut at its last meeting for 2019, and the New Zealand Dollar may face a bearish reaction if Governor Adrian Orr and Co. reiterate that “there remains scope for more fiscal and monetary stimulus if necessary.”

It remains to be seen if the RBNZ will continue to push monetary policy into uncharted territory as Deputy Governor Geoff Bascand reveals that “the Reserve Bank is undertaking further preparatory work on less conventional monetary policy tools.”

The comments suggest the RBNZ will continue to take a preemptive approach in managing monetary policy in order to “demonstrate our ongoing determination to ensure inflation increases to the mid-point of the target.”

Nevertheless, the New Zealand Institute of Economic Research (NZIER) Policy Shadow Board has called “for the OCR to be kept on hold” following the 50bp reduction in August, with the group pointing to “the financial stability risks that stem from interest rates being too low.”

In turn, the New Zealand Dollar remains exposed to the dovish forward guidance for monetary policy, and the rebound from the 2019-low (0.6204) may continue to unravel if the RBNZ continues to embark on its rate easing cycle.

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NZD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, the broader outlook for NZD/USD remains tilted to the downside as the exchange rate trades to a fresh yearly-low (0.6204) in October.
• However, failure to break/close below the Fibonacci overlap around 0.6180 (161.8% expansion) to 0.6210 (78.6% expansion) has spurred a near-term correction in the exchange rate.
• With that said, the lack of momentum to test the former-support zone around 0.6490 (50% expansion) to 0.6520 (100% expansion) suggests the correction is nearing an end especially as the Relative Strength Index (RSI) snaps the bullish formation carried over from September.
• As a result, the string of failed attempts to close above the overlap around 0.6400 (61.8% retracement) to 0.6430 (78.6% expansion) brings the downside targets on the radar, with a break/close below the 0.6310 (100% expansion) region opening up the 0.6180 (161.8% expansion) to 0.6210 (78.6% expansion) area.

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.