NZD in the doldrums

Arnaud Masset Swissquote Bank Ltd

The New Zealand dollar saw heavy selling pressure on Friday amid weak inflation data, which confirms the Reserve Bank’s cautious stance. The Kiwi fell 0.53% against the greenback and hit $0.7230. Indeed, headline inflation eased to 1.1%y/y in the first quarter, down from 1.6% in the previous quarter. After increasing 0.5% in the December quarter last year, tradable inflation contracted 0.40%y/y, while non-tradable inflation eased to +2.3%y/y. The relative strength of the Kiwi during that period explains most of the reduction in price pressures. However, the sector factor model, which is used by the RBNZ as a core measure of inflation, shows that the picture is not that dark as the core gauge held steady at 1.5%y/y (the central bank is targeting 2% +/-1%).

In our opinion, it is reasonable to expect further downside in NZD/USD as the interest rate differential continues to move deeper in negative territory, making short NZD bet costly. In addition, speculators are still net long Kiwi (non-commercial position: net long 40% of total open interest) and will most likely to unwind position as the currency nosedive.

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On the downside, the next key support can be found at 0.7188 (low from March 29), then 0.7154 (low from March 21). On the upside, a resistance lies around 0.74 (high from mid-April). All in all, a return towards 0.70, or even below, seems reasonable.

Author

Arnaud Masset

Swissquote Bank Ltd

Arnaud Masset is a Market Analyst at Swissquote Bank. He has a strong technical background and also works in the development of quantitative trading strategies.

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