NZD/USD bears back in play as dollar firms, eyes to 20-D EMA

• NZD/USD battles to hold on to gains as dollar perks up. 
• Fed and RBNZ are one of the same, both leaning dovish. 
• Geopolitical dramas to keep risk at bay.

NZD/USD's downside has paused in late New York while the greenback's advance is capped following a recovery from the 200-D EMA in the DXY. Indeed, while there are those speculating on a Fed rate cut, given the dismal nonfarm payrolls, there were still elements in that reports that were positive. 

The accumulation of the recent reports remains consistent and above the Fed's target for employment, so one report alone is unlikely to change the FOMC's collective approach to monetary policy, although it is certainly a concern and something that will be scrutinised. The CPI data this week, as well as retails, sales will be critical considering the recent focus on economic expansion, an escalation of the US-China trade dispute that is seen to be putting pressure on the economy and indeed the inverted yield curve. 

US CPI and Retail Sales in view

Analysts at TD Securities offered their outlook for both US CPI and retail sales as follows:

• "We look for headline CPI to slow to 1.8% in May on the back of a 0.1% monthly gain. The softer monthly increase is largely the result of a normalization in energy prices.
• Core inflation should remain steady at 2.1% y/y, reflecting a firm 0.2% m/m advance. Although we pencil in a softer 0.2% m/m increase in core services, we expect a long-delayed rebound in core goods (+0.2%)."
• "We expect a firm increase in auto sales to be the main driver behind a 0.8% rise in the headline measure for May. Although we expect sales at gasoline stations to
• remain supportive of the headline figure, it will be at a lower magnitude that reflects stabilization in gasoline prices. Furthermore, we anticipate sales in the key control group to rebound modestly at 0.2% m/m."

Meanwhile, as per geopolitical matters, which make for volatility given the market's tendency to move one each and every development, particularly related to China, the US and Mexico in recent trade, it appears that all will now depend on the next G-20 summit, which is scheduled for June 28-29 in Osaka, Japan. Trump is supposed to meet with Xi and Trump confirmed today that additional tariffs on Chinese goods will be levied if Chinese President Xi Jinping does not attend this month’s G-20 meeting. If previous threats from Trump are anything to go by, then levies on another $300 billion in Chinese goods could be in store for Chinese imports if a trade agreement is not reached soon - (There was an increase of tariffs last month on $200 billion worth of goods the U.S. imports from China). Meanwhile, as per Mexico, it seems that that risk has been abated, for now. Trump made announcements late Friday, post-market close, that a deal had been struck and that tariffs have been indefinitely postponed. 

Watching the dots this time around

Nevertheless, escalating trade tensions and recent signs of a cooling labor market are currently stoking expectations in financial markets for three Fed interest-rate cuts by year end. According to CME group, the expectations of a July rate cut has risen to above 85%. All eyes will be on the next Fed dot plot that will be published at the close of the Fed’s June 18-19 policy meeting and any such headwinds reflected in June’s dots could prove dicey for the dollar bulls. The most recent dot plot, released in March, showed all 17 Fed policymakers projected no change to rates over that stretch.

More cuts to the OCR on the way

Meanwhile, as for Nw Zealand, there are no domestic releases this week, but it is worth noting that the OCR, at 1.5%, is now at a record low following a pre-emptive cut from the RBNZ last meeting around earlier this year - a seeming tailwind to growth.  However, citing a faltering global economy as well as New Zealand businesses that are reluctant to spend and invest, analysts at ANZ Bank New Zealand think that more OCR cuts will be needed to ease financial conditions further and ensure that monetary policy supports a gradual recovery in growth, inflation and employment. In such a scenario, should the Fed hold off from cutting rates so soon, there are downside risks for the bird.

NZD/USD levels

The late January and February lows, as well as the 200-day moving average at 0.6708/19, are no longer in focus following the break below the 50-D EMA that meets the 23rd April lows. Instead, a continuation to the 20-D EMA and 24/25 April double bottom lows at 0.6580 guards a break to 0.6560 late May and then the May low at 0.6475 as well as in the 0.6464/24 area. A failure there opens the 2016 low at 0.6347.