Last week we highlighted some potential underlying short-term technical and fundamental weakness in NZDUSD. The techs were looking very weak after RSI broke out of what was a carbon copy of a trading channel in price action, which turned out to precede a further sell-off in price.
The release of soft Q3 inflation figures and the associated action in swaps markets didn’t help the pair. NZ Q3 consumer prices rose 0.3% q/q, missing an expected 0.5% increase. This brings year-on-year inflation to 1.0% from 1.6% previously. The numbers show that inflation was well below the RBNZ’s target last quarter which has pushed it to the bottom of the bank’s 1-3% target range.
Investors, banks and other market players immediately began to push back their expectations for interest rates in NZ on the back of today’s figures. In fact, it’s entirely possible that the RBNZ will leave monetary policy alone until late 2015. The determining factor may be the kiwi, which is holding back tradable inflation – non-tradable inflation rose 0.5% q/q, while tradeable inflation only rose 0.1% q/q.
The end result was a significant sell-off in NZDUSD which sent it below 0.7800. However, the pair has since retraced some of its lost ground and is now hovering below a resistance zone around 0.7905. This is largely due to a positive turn in investor sentiment on the back of the weekend’s stress tests by the ECB, which didn’t show any glaring weaknesses in the banking sector within the eurozone.
Looking ahead, the fundamental outlook for the kiwi is fairly weak given the revised inflation outlook for NZ and the RBNZ’s distain for a high exchange rate. In saying that, there is a lot on this week that could influence NZDUSD. Apart from the all-important FOMC meeting, there’s another policy meeting at the RBNZ and there’s some important economic data out of NZ and the US as well.
From a technical perspective, 0.7900 has been an important zone for the pair in the past as it has acted as both resistance and support. A confirmed break here may open up a push to psychological resistance around 0.8000. On the downside, 0.7790/0.7800 is the zone to watch.
Source: FOREX.com
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