Key Points:
- Kiwi dollar is likely entering a ranging phase.
- August rate cut has largely been priced in.
- FOMC Meeting could see increased volatility this week.
The kiwi dollar was in steep decline last week as a result of the weaker CPI results and a bit of jawboning by the RBNZ. The combined influence of the two events sent the NZD back to the lows seen during the chaos of the UK Brexit referendum. Consequently, this week’s NZ Trade data will be vital in establishing a bias for the pair and a weaker outcome could see this support broken, much to the delight of the RBNZ.
The kiwi dollar came under heavy selling pressure as the week opened, with the weaker NZ CPI results being largely to blame. The figure came in at 0.4%, as opposed to the forecasted 0.5%, and this saw the pair extend on last week’s bearishness.
However, any hopes that the NZD was regaining buoyancy mid-week were quickly dashed as the RBNZ made its intentions clear. Effectively guaranteeing an August rate cut, the Reserve Bank cited downgraded inflation expectations as grounds for devaluation.
Looking at the technical data now, the NZD/USD is currently hovering above a rather robust zone of support which could cap the downside risk. The 0.6959 level has proven particularly difficult to break through, holding firm even during the fallout from the Brexit.
Additionally, this level also now coincides with the 100 day EMA which should supply further dynamic support. However, RSI remains relatively neutral and the stochastic oscillator has now moved out of oversold territory. Combined with bearish 12 and 20 day EMA activity, this could mean a sizable plunge if the NZD does manage to stage a breakout to the downside.
As we move forward, the pair will be looking to the NZ trade data in order to confirm a bias for the week ahead. Presently, the Exports, Merchandise Imports, and Trade Balance results are all forecasted to come in somewhat more subdued than last time. As a result, this could see some significant selling pressure mounting early on.
However, if the trade data surprises the market with some stronger postings, it could help the kiwi dollar to stay afloat in the short term. As with most pair’s, the FOMC Meeting will also be in focus so keep an eye out for any surprise rate changes.
Ultimately, with the RBNZ stating its intention to devalue the kiwi dollar in no uncertain terms, the NZD is unlikely to be making a strong recovery any time soon. However, the potential for an August rate cut has basically been priced in now which should prevent the pair from tumbling further.
As a result, the kiwi dollar is likely set to remain range bound between the 0.7058 and 0.6952 levels in the short to medium term. This being said, keep a close watch on the FOMC Meeting as it will play its usual role in increasing this pair’s volatility.