NZD/USD testing key 0.7000 level following Tuesday’s dramatic drop

Things have gone from bad to worse for the kiwi throughout Tuesday’s session. NZD/USD has dropped all the way from Asia Pacific session starting levels above the 0.7150 mark all the way down to current levels at almost bang on 0.7000. That amounts to more than 150 pip drop on the day, which equates to losses of around 2.2%. Unsurprisingly, NZD is by far the worst-performing G10 currency on the day.

Note that the 0.7000 level is a key area of support; the psychologically important level provided a solid floor to the price action last December. A break below this level could open the door to an extension of technically driven selling, amid a lack of any notable areas of support to the downside. While longer-term NZD bulls might see Tuesday’s pullback as an opportunity to get long the kiwi, many traders might be wary of “catching a falling knife” and may instead want to wait to see how things shake out over the coming days.

Driving the day

In terms of the reason for Tuesday’s selling pressure; the New Zealand government announced a new NZD 3.8B housing fund to boost the supply of new builds with the aim of slowing the recent run higher in house prices and maintaining economic stability – market participants seem to see this move by the government as taking some of the pressure off of the RBNZ to tighten policy moving forward; recount that the RBNZ is now expected by the government to take house price inflation into account as part of its inflation mandate, so when the government acts to curb house price inflation, this takes pressure off the RBNZ to tighten policy to achieve the same result, and so is being taken as an NZD negative.

According to ANZ, “some might call (Tuesday’s sell-off) an over-reaction... (but) given the role housing plays shaping the growth outlook, the immediacy of the changes and the surprise removal of tax deductibility on interest, the adjustment seen is warranted given the implications for the OCR”. On which note, the bank comments that they “think a further downward adjustment in OCR expectations is likely over coming days; USD gyrations aside, that speaks to headwinds for the NZD for a little longer”. Looking ahead for the kiwi, New Zealand February Trade data is in focus and will be released at 21:45GMT.