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NZD/USD Rate to Recoup Losses on Strong New Zealand CPI

NZD/USD Rate to Recoup Losses on Strong New Zealand CPI

2020-01-22 01:00:00
David Song, Strategist
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New Zealand Dollar Talking Points

NZD/USD approaches the monthly low (0.6584) ahead of the update to New Zealand’s Consumer Price Index (CPI), but an uptick in the headline reading for inflation may curb the recent decline in the exchange rate as it encourages the Reserve Bank of New Zealand (RBNZ) to retain the current policy at its first meeting for 2020.

NZD/USD Rate to Recoup Losses on Strong New Zealand CPI

NZD/USD chips away at the correction from the 2019 low (0.6204) even though the US and China sign the Phase One trade deal, and the decline from the monthly high (0.6733) may gather pace amid the weakening outlook for the world economy.

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The International Monetary Fund (IMF) trimmed its global growth forecast for 2020, with the agencywarning that “the 2019 global growth estimate and 2020 projection would have been 0.5 percentage point lower in each year without monetary stimulus.”

The slowdown in global activity may push the RBNZ to further insulate the New Zealand economy as Governor Adrian Orr and Co. pledge to “add further monetary stimulus if needed,” but the update to the CPI may keep the central bank on the sideline as the headline reading for inflation is expected to widen to 1.8% from 1.5% per annum in the third quarter of 2019.

Image of DailyFX economic calendar

Signs of stronger price growth may spark a bullish reaction in the New Zealand Dollar as it encourage the RBNZ to keep the official cash rate (OCR) at 1.00% at the next meeting on February 12, and the central bank may endorse a wait-and-see approach over the coming months amid the narrowing threat of a US-China trade war.

It remains to be seen if the RBNZ will alter the forward guidance for monetary policy as the New Zealand Institute of Economic Research (NZIER) sees an improvement in business sentiment, but the ongoing shift in US trade policy may force the central bank to implement lower interest rates as the Trump administration remains reluctant to rollback tariffs.

With that said, Governor Orr and Co. may continue to strike a dovish tone in 2020, and the diverging paths between the RBNZ and Federal Reserve may produce headwinds for NZD/USD as Chairman Jerome Powell and Co. see US interest rates on hold over the next 12 months.

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NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • The NZD/USD correction from the 2019 low (0.6204) appears to have run its course as it failed to produce a test of the July high (0.6791), with the opening range for 2020 casting a bearish outlook as the exchange rate snaps the upward trend from December.
  • The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator falls back from overbought territory and fails to preserve the bullish formations carried over from the previous year.
  • The close below the 0.6600 (38.2% expansion) to 0.6610 (38.2% expansion) region opens up the Fibonacci overlap around 0.6550 (50% expansion) to 0.6570 (61.8% retracement), with the next area of interest coming in around 0.6490 (50% expansion) to 0.6520 (100% expansion).
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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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