The RBNZ was noncommittal on rates - touting domestic strength but
expressing worries about the global economy. NZD dropped as risk
appetite soured a bit in Asia. Today we look at possible downside
targets for NZDUSD should key support give way.
The RBNZ's rate decision saw Bollard bemoaning the international
economic risks, including the "real risk that global economic activity
slows sharply." He also expressed worry about the potential for a
rising cost of bank funding. On the domestic front, the strength of
recent data was noted and Mr. Bollard indicated that New Zealand didn't
need rates as low as the current cash rate but that the balance of
domestic/international factors demanded a pass for now. Forward rate
expectations eased a couple of bps, but the market continues to expect
that the RBNZ will be the only bank among the G-10 currency central
banks that will raise interest rates in the coming year.
While the New Zealand economy has been strong and given the
currency a boost, we have to consider a couple of factors here on
whether it will remain resilient. First, the tremendously strong
weakening impulse of late across Asian currencies versus the US dollar
has to be giving the kiwi bulls some pause, as the market seems to be
(justifiably) questioning the prospects for near to medium term Asian
growth. A continuation of this trend will be difficult for kiwi traders
to ignore. Secondly, the kiwi also got a tremendous boost from China's
announcement of investments in New Zealand earlier this year. Whether
this source of capital flows will continue is an open question, but it
has already served to give "artificial support" relative to fundamental
inputs like interest rate spreads as we show in the second chart below
and further strength from these levels is certainly unwelcome from New
Zealand's perspective.
Chart: NZDUSD
The technical situation for NZDUSD is very interesting here, as we
are facing a somewhat sloppy, but still relatively well defined head and
shoulders formation with a neckline fast approaching, or already almost
here depending on how the line is drawn between the mismatching points
on the chart. Still, we seem to be in a pivot zone just below current
levels at 0.8115. The next targets lower are the 200-day moving average
currently around 0.7930 and then the bigger area lower is all the way
down at 0.7340. Of course, to see this latter level come into play, we
would likely either need further turmoil in Asia markets and/or the
S&P500, for example to drop out of its current persistent range.
Chart: NZ vs. US 2-yr rates
The eroding of forward expectations for the RBNZ (NZ 2-yr rates
have fallen some 50 basis points since late July and year forward rate
expectations, according to a Credit Suisse index, have fallen some 65
bps over the same period. Some of the decoupling here between the
NZDUSD's behavior and the rate spread has likely to do with China's
interest in buying NZ assets. But looking back to February or so of this
year on the chart, we can see that NZDUSD was trading below 0.75 at the
current rate spread.
If we get an upside break in risk appetite in the days ahead (US
FOMC meeting will be a critical event risk across global markets next
Wednesday and judging from recent action, the market is extremely
twitchy on ad hoc Europe-related developments), then we are perhaps more
likely to see a scenario in which we first build another "right
shoulder" on the NZDUSD chart.
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