NZD/USD: Make or break time as RBNZ rate decision looms

It has been a very interesting day in the financial markets, even though the economic calendar has been light. The stock markets have been very volatile and after an initial bounce, Wall Street has turned red with the major indices breaking some key support levels. In FX, the EUR/USD broke out above last Thursday’s high that was achieved in the aftermath of a ‘disappointing’ ECB policy decision. Stock market investors are worried about the potential impact on emerging markets of a US interest rate rise, which is most likely to happen next week. Then there are the on-going concerns over China and the continued falls in commodity prices. Today, crude oil managed to initially rise on the back of the latest stockpiles data from the EIA. But shortly afterwards both oil contracts turned lower again as the 3.6 million barrel draw in crude inventories was offset by the sharp 5.0 million barrel build in distillate stocks.

The market’s focus is now slowly shifting towards tonight’s Reserve Bank of New Zealand (RBNZ) policy meeting at 20:00 GMT (15:00 ET) or Thursday morning NZ time. As we mentioned in our NZD/JPY article yesterday (see “NZDJPY’s advance rejected at critical zone ahead of RBNZ,” for more), the continued falls in key commodity prices, including milk, means that the odds slightly favour a cut. However, the market is split. So, whatever the decision, we could see a sharp move in the NZD/USD and NZD crosses, at least in the short term anyway. Our base case scenario is that the RBNZ will cut rates and we are therefore bearish on the NZD.

Ahead of the RBNZ, the NZD/USD exchange rate was little changed after making back most of its earlier losses. At the time of this writing, the Kiwi was just about holding its own above the 0.6620 support, the back side of a broken bearish trend and the now-rising 50-day SMA at 0.6630. But it was a struggle as commodity prices fell and trading on Wall Street was very volatile, suggesting a rise in risk aversion. For the Kiwi, the 0.6620 is a pivotal level and another break below here could see the resumption point of the long-term downward trend.

But if the RBNZ turns out to be less dovish than expected then the NZD/USD could easily rally towards resistance levels such as 0.6700 or the previous high and 38.2% Fibonacci retracement around 0.6785/6805. Above these levels, the next major resistance areas are at 0.6890/0.6900, the convergence of the 2000-day moving average with a bearish trend line that has been in place since July 2014, followed by 0.6985/0.7000, the 50% retracement and a psychological level.