NZDJPY's advance rejected at critical zone ahead of RBNZ

Commodities have been today’s buzzword in the financial markets as oil dropped to the lowest level since the financial crisis and iron ore hit its lowest since 2005. Commodity currencies such as the AUD, NZD and CAD have been hit hard as a result. Things could get worse for the NZD should the Reserve Bank of New Zealand decide to cut interest rates tomorrow evening (or Thursday morning NZ time). As we mentioned in the weekly outlook, the RBNZ faces a difficult dilemma this week after it recently noted that it expects 2.5% to mark the low in this interest rate cutting cycle (currently 2.75%). Given the continued falls in key commodity prices, including milk, the odds slightly favour a cut. However, the market is split. So, whatever the decision, we could see a sharp move in the short term. Our base case scenario is a cut and we are therefore bearish on the NZD.

From a technical point of view, the NZD/JPY’s recent advance has been rejected at a major resistance zone between 82.70 and 83.35. As can be seen on the chart, this area was previously support and resistance, and marks the 50% retracement level of the drop from the 2014 high when it became apparent the RBNZ’s rate hiking cycle was coming to an end. The selling pressure for much of this year has caused the NZD/JPY to drop below its main moving averages and it has only recently moved back above the 50-day SMA. Nevertheless, both price and the 50-day SMA still hold below the 200-day SMA, so the trend is still technically bearish.

Since the NZD/JPY formed a low at 72.75 at the end of the summer, it has been rising inside a short-term bullish channel. But this channel could also be thought of as a longer term bear flag, which is a bearish pattern. Given the recent “risk off” tone in the financial markets and the still-dovish RBNZ, the support trend of this pattern could break down, possibly as early as this week. If so, the NZD/JPY could drop sharply in the ensuing days and possibly weeks.

Some of the short-term support levels to watch include:

• 81.10, previously resistance;
• 80.50, the 50-day SMA and the support trend of the channel/flag and
• 80.00, a psychological level.

If these levels break down then the Fibonacci retracement levels of the bounce from August would become relevant. On the other hand, if the NZD/JPY rallies, one will need to watch resistances such as 82.00, 82.70 and 83.35 closely. A potential break above the latter would expose the 200-day SMA at 83.80 for a test.

Figure 1: