- RBNZ in focus with risks balanced either way.
- NZD/USD 0.6950 opens 0.6900 and then 0.6880 on the downside.
- NZD/USD 0.6980 and 0.7020 guard 0.7050 and 0.7080s on the upside.
If we take the US dollar into consideration, there are prospects of a sustained break to the upside in NZD/USD, especially if the Reserve Bank and New Zealand surprise with a 50bp rate hike today.
The following illustrates the bearish bias in the greenback and the prospects of a significant correction in the kiwi which is meeting daily support as per the horizontal and dynamic trendline.
DXY spinning top
The US dollar is highly bullish for the foreseeable future, although it is taking a breather ahead of the RBNZ. This gives way to the prospect of a correction to test the prior resistance as marked out in the above chart between the 61.8% Fibonacci and the 38.2%. This leaves 96.20 and 96 the figure vulnerable to a test in the coming days. This gives way to a bullish flight map for the bird as follows:
NZD/USD daily chart
The kiwi has been pressured despite the well-telegraphed intention of the central bank in New Zealand to hike the OCR rate by at least 25bps today. The market is looking for continued hikes into a 3% target over the course of several meetings in increments of between 25bps and 50bps.
Markets are already pricing in an expectation that the OCR reaches around 2.5% in a year’s time. The bird has been unable to take flight, however, partly due to growing expectations that policy will be normalised elsewhere. The Federal Reserve minutes are coming up later today as well and there is a risk in there also. Therefore, traders may be reluctant to back the bird much further than an initial knee jerk reaction to the upside in either 25bps or 50bps. Traders will need to balance the risks to the economy should the RBNZ intend to hike by 50bps straight of the bat.
NZD/USD upside levels
From a daily perspective, the 200 EMA is located in an area of structure between 0.6980 and 0.7020 which may be a tough area of resistance to crack on just a 25bp hike for which the market is widely positioned. 0.7000 the figure is a big volume area.
Over the course of the sessions ahead, the 0.7080s will not be out of the question on a 50bps hike if the 0.7050 volume area is breached. If on the other hand, if the Fed comes in less hawkish than anticipated, or if there is no further insight into the pace of tapering, then the bird will likely enjoy autopilot mode. NZD/USD can glide into the 0.7100 areas with a focus on 0.7150 for the end of the year.
RBNZ dovish outcome
The risk to the downside comes on a uber hawkish set of Fed minutes coupled with a dovish hike from the RBNZ. A dovish hike could consist of concern over covid contagion, geopolitical risks, the guidance of incremental 25bps hikes, contingent on various factors. All of the above would catch an already heavily long positioning in the kiwi market offside. 0.6950 is a line in the sand in this regard and a break will open risk to a restest of the 0.6880s and then 0.68 the figure.
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