nzdusd the next potential domino to fall in the short term as rbnz looms 2692392017

On this coming Thursday, 11 May, RBNZ will meet and decide its latest monetary policy. Market consensus is calling for a status quo in monetary policy where its benchmark policy interest rate (official cash rate-OCR) is expected to remain at 1.75%, a record low.

The focus will be on the tonality of the monetary policy statement where in the last meeting held on 22 March 2017, RNBZ had reiterated that monetary policy will remain accommodative for a considerable period as numerous uncertainties remain on the international environment and policy may need to adjust accordingly. In addition, it projected that the OCR would remain at 1.75% until the second half of 2019.

There are a couple of new economic data to take note since the last monetary policy meeting as follow:

• Q1 2017 inflation data came in stronger than expected where headline inflation increased by 2.2% y/y versus 1.3% y/y seen in Q4 2016 and above consensus of 2%. Core inflation increased to 2.16% y/y versus 1.42% y/y seen in Q4 2016.
• Housing price growth has slowed down sharply since August 2016, especially in hotspots such as Auckland. A point to note that RBNZ’s forecasts have relied on strong household spending, supported by rising housing prices to reinforce economic growth and domestic inflation.

Even though inflation has reached RBNZ’s 2% mid-point target range, RBNZ is likely not to “jump the gun” and maintain its current stance on monetary policy guidance as recent increase in headline inflation may be temporary as oil price had started to decline where WTI crude had dipped below U.S$50 per barrel. Also, a continuation of slowdown in the housing market may also curb consumer spending which will lead to a slower projected economic growth in the near future.

In addition, several external risks remain such as U.S. President Trump’s proposed large fiscal stimulus that may face stiff opposition in the U.S. Congress which can delay its implementation. Also, regional geopolitical risk due to rising tensions between U.S. and North Korea.

Now, let’s us take a look at the latest technical elements on NZD/USD

Short-term technical outlook on NZD/USD

(Click to enlarge chart)

Key technical elements

• The rally seen in the NZD/USD that has occurred in January 2017 has stalled right at the key long-term pivotal resistance zone of 0.7380/7520 (see weekly chart).
• Since the 25 August 2015 low, the NZD/USD has been evolving within an ascending range that has lasted close to 1.5 years. Current price action of the pair is now coming to retest this significant ascending range support now at 0.6850 (see weekly chart).
• On the shorter-term, the pair has traced out a “Descending Triangle” range bearish continuation pattern since 27 April 2017 low with its support at 0.6850 that also confluences with the aforementioned longer-term ascending range support (see hourly chart).
• The “Descending Triangle” range resistance stands at 0.6945 (see hourly chart).
• The next significant short-term supports after 0.6850 rests at 0.6760 (Fibonacci projection cluster) follow by 0.6690/50 next (Fibonacci projection cluster & the lower boundary of a short-term descending channel in place since 28 February 2017 high).

Key levels (1 to 3 days)

Pivot (key resistance): 0.6945

Supports: 0.6850, 0.6760 & 0.6690/50

Next resistance: 0.6990

Conclusion

As long as the 0.6945 short-term pivotal resistance is not surpassed, the NZD/USD is likely to see a push down to test the critical range support of 0.6850 and a break below it opens up scope for the start of a potential medium-term bearish impulsive downleg to target the next supports at 0.6760 and 0.6690/650 next in the first step.

On the hand, a break above 0.6945 may negate the preferred bearish tone to see a squeeze up to retest the short-term descending channel resistance at 0.6990.

Charts are from eSignal

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