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New Zealand Dollar Outperforms Ahead of RBNZ Rate Decision, Japanese Yen Pares Two-Day Rally

New Zealand Dollar Outperforms Ahead of RBNZ Rate Decision, Japanese Yen Pares Two-Day Rally

2010-03-10 16:48:00
David Song, Currency Strategist
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The New Zealand dollar extended the rally from earlier this week and is the best performing currency against the greenback on Wednesday as investors raise their appetite for risk. The NZD/USD is 50pips higher on the day after moving 85% of its average true range, but the bearish divergence in the 30-minute RSI could drive the exchange rate lower and lead the pair to fill-in the gap from the 120-SMA at 0.7016 going into the Asian trade. As the near-term rally appears to have stalled ahead of the 50-Day SMA at 0.7098, we may see a corrective retracement following the four-day rally as the pair maintains the broad range carried over from the previous month. Nevertheless, the Reserve Bank of New Zealand is widely expected to hold the benchmark interest rate at 2.50% later today as Governor Alan Bollard pledges to keep borrowing costs at the record-low throughout the first-half of the year, but comments following the rate decision is likely to spark increased volatility in the exchange rate as investors weigh the prospects for future policy. As a result, hawkish rhetoric from the RBNZ could lead to a bullish breakout in the NZD/USD given the rise in risk appetite, but dovish remarks could lead to range-bound price action as investors scale back expectations for a rate hike later this year.

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The Japanese Yen weakened across the board and pared the two-day rally against the greenback, with the exchange rate crossing back above the 50-Day SMA (90.54) to reach a high of 90.80. The USD/JPY remains nearly 80pips higher from the open after moving 105% of its daily ATR, but the overnight rally appears to have tempered off as the 30-minute RSI falls back from a high of 74. As a result, we may see a short-term pullback towards the 120-SMA at 90.13, and we may see the dollar-yen trend lower over the near-term as the pair maintains the downward trend from the 2007 high (124.13). However, as the 20,50, and the 100-Day moving averages converge, we may see the pair continue to trend sideways over the week as price action continues to hold below the 200-Day SMA at 91.91.

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To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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