NZDJPY: Don't Fight the …RBNZ?

In a generally quiet week for economic data, the marquee event could be the RBNZ’s monetary policy decision. My colleague Chris Tedder noted earlier this week that the central bank is likely to hike the official cash rate by 25bps to 3.50%, but that a rate hike is already fully priced in by the market. Instead, the value of the New Zealand dollar is likely to hinge on RBNZ Governor Wheeler’s accompanying statement: if he suggests that the central bank could pause its rate hike trajectory, the kiwi drop sharply, but if he stubbornly sticks to the aggressive rate hike script, it could squeeze shorts and drive the NZDUSD back toward its 3-year highs around .8800.

That said, the NZDJPY may actually offer the better long-term trading opportunity heading into the RBNZ meeting. As we go to press, the pair is testing an 11-month bullish trend line around .8800, as well as its 50- and 100-day moving averages. Given the confluence of all these long-term trend indicators, a sharp move in either direction could set the tone for weeks or even months to come.

On a purely technical basis, there are some concerning signs for bulls. For one, the pair put in a potential double top pattern off the resistance at 89.70 over the last four months. Bolstering the bearish case, the two highs created a clear bearish divergence in both the RSI and MACD indicator, showing less momentum on the second run higher and increasing the probability of a major top.

Here in the US, “Don’t Fight the Fed” is popular trading motto that emphasizes the massive influence that central banks have on markets. “Don’t Fight the RBNZ” doesn’t quite have the same ring to it, but the same principle holds. If Wheeler indicates that the central bank plans to stick to its aggressive rate hike path, the NZDJPY could easily bounce from its converging support level and make another run toward 89.00 or 90.00 in the coming weeks. On the other hand, if Wheeler suggests that the RBNZ favors a pause, the bearish technical picture could quickly drive the NZDJPY down toward the 200-day MA and 5-month low around .8600.