NZD/USD: it's either a head fake or the start of a new beginning through 2018 trendline resistance

NZD/USD is on the cusp of a meaningful correction, but the fundamental case is highly contingent on external factors and the sustainability of the move that started from 0.6501 is questionable. The Chinese Yuan has been dictating direction while the dollar's relentless strength has also been scrutinized in recent sessions leading to re-positioning where risk sentiment has switched from cold to hot. 

However, it appears that investors might be looking at the global economies outlook through rose-tinted glasses and somewhat complacent considering the number of systemic risks factors that are lurking around the corner. For instance, today marks that day that USD200bn of tariffs kick off in the US and USD110bn in China - the implications are that Trump retaliates to China's refusal to attend trade talk meetings this week by threatening to slap tariffs on the remaining US imports from China. Also, the usual suspects in EM (TRY, ZAR, RUB, BRL, INR) are all lower following last week's drift higher in the greenback and US rates look to be stablising, building foundations on 2.8% in the US ten year yields that have penetrated as high as 3.097% in recent sessions - which does not bode well for the EM-FX space. 

RBNZ & FOMC expectations 

Meanwhile, we have the RBNZ this week which is a tad more interesting following the nation's impressive GDP data that beat the Central Bank's forecast by some margin - June quarter GDP was 1.0%, compared to the RBNZ's forecast of 0.5%. However, analysts at TD Securities argued that "GDP are mitigated by trade risks, low CPI and dismal business sentiment. Unanimous consensus expects the OCR to remain at 1.75% and the Governor to muse that the OCR could move “up or down” as per the Aug MPS. Dropping “we expect to keep the OCR at this level ... into 2020” is an unlikely hawkish twist."

As far as the FOMC goes, its all about the median forecasts and dots. Analysts at Nomura offered their outlook for the Summary of Economic Projections which will be critical this week:

"On policy rate expectations in Summary of Economic Projections, we do not expect any changes to the FOMC’s median policy rate forecasts at the September meeting for 2018- 20. The FOMC will likely continue to forecast a total of four hikes in 2018, one more after the expected hike at the September meeting, three hikes in 2019 and one hike in 2020. However, the September Summary of Economic Projections (SEP) will be extended by one year, through 2021. We expect the Committee’s median rate forecast for 2021 to remain at 3.375%, unchanged from the median forecast for 2020. While we do not expect many participants to revise their longer-run policy rate forecast, we expect the median longer-run forecast to rise to 3.0% for a technical reason. The current median forecast of 2.875% for the long-run policy rate is the average of two participant’s forecasts due to an even number of submissions. Richard Clarida’s confirmation in lateAugust as Vice Chair adds an additional longer-run dot and will likely raise the median by 12.5bp to 3.0%. However, it is important to note that this is unlikely to signal a shift in the Committee’s thinking around the longer-run rate. For other aspects of September FOMC meeting,"

• FOMC's dot plot preview - TDS

NZD/USD levels

Support is located at 0.6650 and resistance is located at 0.6720. The late August trend line resistance back at 0.6550 was left behind and the 2018 trend line has been pierced - The question now is whether this was just a head fake or the move can be sustained. On a meaningful continuation, 0.6840/50 comes into the picture and closes through 0.6720 opens up the runway for the bird to take flight. First, the pair needs to break 0.6711 as the 76.4% retracement of the daily downtrend from 0.7393. A drop back into the downside opens a continuation risk towards 0.6500 that would open up 0.6344 and 0.6306 on the wide.