NZD/USD: Bird has some room to go if targeting the 50% retracement

  • NZD/USD has been moving up the ladder of glory on Thursday following a relief in the US PI data that slowed down to stock market rout, weighed on yields and the US dollar. 
  • NZD/USD has been tracking the breakdown in the Chinese currency that has firmed vs the greenback all the way from the R1 highs up at 6.9416 down to a recent low of 6.8679.

However, there is a sense that the Yuan may not be out of the bamboo fields yet considering the poor state of the Chinese economy and fundamental global macro risks and a divergence from the performance in the US economy that has simply not vanished overnight due to one US CPI reading.

Yes, we had a needed shake out in the US indexes, but take a look around - The Chinese CSI 300 index is the lowest we have seen since summer 2016. In contrast, the Dow Jones Industrial Average DJIA, also keeps falling, and tumbled a further  545.91 points on Thursday, or by 2.1%, to 25,052.83, and bringing its two-day decline to 1,378 points. However, the economy has the growth story that the Chinese don't and market action is being dominated by short-term players. 

Can the US keep growing at the same pace it has since 2016?

However, on the flipside, if investors are waking up to strong possibility that the US economy can't continue to grow at the pace that it has done since 2016 due to tighter monetary conditions in a tighter interest rate environment, then perhaps we are seeing some mean reversion and a correction to a fair value in US equities - and with the longest bulls run in history, this as something that market participants were likely looking for  - A reason to sell. When the dust and markets even out, we still have all of the very same risks on a macro scale that has favoured the dollar in the past and there still is no sound alternative for investor's idle capital other than the US on the horizon, not until the greenback is much-much lower making overseas investments better value.  

Comments from Joseph Trevisani, FXStreet senior analyst at FXStreet are methodical on this matter and one would expect a return of the greenback in no time: 
The Fed is not pursuing inflation, it is not seeking to damp an overheating economy. It is chasing a 'normal' rate environment and will continue to do so as long as economic growth holds up.

The Fed has been raising rates for more than two years. In that time U.S. economic growth has accelerated from 1.5  percent in 2016 to 3.4  percent in the first half of this year. Will the gain of another 100 points in the Fed Funds to the historically modest level of 3.25 percent really be the tipping point that sends the economy into recession?

Meanwhile, and back to the Kiwi, analysts at ANZ Bank New Zealand explained that softer than expected US CPI figures allowed fixed income markets the ability to pause for breath:

"With yields off their highs, the USD is weaker too, which has boosted this cross. However, with equity markets still in the red, jitters clearly remain which means it is unlikely the kiwi pushes too much higher."

NZD/USD levels

  • Support 0.6460
  • Resistance 0.6590

Technicals are still mixed, although fundamentals are still in the bear's favour longer-term. The 50% Fibo is located at 0.6562 and a touch above daily R3. Will it make it there? RSI says yes. While ATR is just about maxed out on a daily basis, the 4hr sticks are constructive with higher highs and higher lows and no sign of exhaustion  - RSI there has further to go until the Sep highs. The 100 4hr SMA on the 0.66 handle will guard the top of the descending channel with the confluence of the 61.8% Fibo - A very nice discount to be short at. On the flipside, 0.6442, just below the pivot, comes as the recent swing low where sellers could emerge eyeing a break of 0.6424 for a premature run back to the downside of the descending channel.  The monthly charts are certainly more indicative of a continuation to the downside, with RSI headed south towards 30 with chars in a sea of red and no obvious indication of any sustainable let-up.

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