Dovish Comments Fail to Stem Kiwi Dollar Strength

In spite of a recent interest rate cut and continued dovish jawboning, the New Zealand dollar continues to rise versus the US dollar, just as the Central Bank hints at more accommodation in the pipeline. With the battle against deflation picking up speed, warnings of more interest rate cuts have not been enough to significantly deter NZD bulls who have been rewarded with a 9.15% return over the last 52-weeks. Thanks to a strong economy that boasts some of the highest interest rates among advanced economies alongside low unemployment make New Zealand an easy choice for speculators. However, threats of further accommodation may upend the recent rally in the NZD/USD pair, especially with the knowledge that the US Federal Reserve may opt to raise interest rates before the end of the year.

Speculators Betting on Sustained Expansion

While the deflationary wave that has crossed the globe has left no stone unturned, New Zealand has largely been able to avoid the consequences.  However, for some time, the nation had to contend with weakening prices for agricultural products, notably dairy prices which have been trending at depressed levels for the better part of the year. Brought on by oversupply that has seen rampant stockpiling, prices fell precipitously over the last year and have only recently rebounded following moves by dairy farmers to cut their herd sizes. Now that dairy prices have risen nearly 12.70% during the first two weeks of August amid declining herd numbers, these tailwinds are providing a notable benefit for the Kiwi dollar. Improvements in dairy prices have enhanced the outlook for the New Zealand economy, but as Reserve Bank of New Zealand Governor Graeme Wheeler stated overnight, risks to the outlook do remain.

For one, lower rates have increased the risks of a housing bubble emerging in major cities. Second, headline inflation remains well below levels targeted by the Central Bank all while the exchange rate remains significantly elevated. The resulting policy outlook remains mostly dovish considering the potential for further movement on interest rates. However, it is important to recognize that officials believe that the overvalued New Zealand dollar will not retreat unless monetary policy is completely dedicated to this matter. As a result, it is not wise to expect imminent easing of policy, with Wheeler remarking that, “we do not believe that the outlook and balance of risks warrants a position of no policy change, nor a position of rapid easings.”  As a result, the ongoing Kiwi dollar rally may persist near-term while downward pressure may reemerge more medium-term based on policy decisions approach or if the US dollar should rebound.

Technically Speaking

After the policy speech conducted earlier in the week, the New Zealand dollar soared higher versus the US dollar, climbing past resistance at 0.7305 after a period spent consolidating in an ascending triangle formation. The triangle pattern, formed by the convergence of horizontal resistance and an upward trend line has just seen the upper bound broken, however, it remains to been seen as to whether the move is a breakout or a just a fake move. If the candlestick manages to close above the level, it is a good indication that a breakout is underway, a move that will be confirmed by higher volatility and volume. However, if prices slip back below the former resistance level, it could be an indication that the breakout trade was premature. Should the trend line be broken however, it could suggest a reversal.

In support of the more bullish bias evidenced by the ascending triangle pattern are both the 50 and 200-day moving average. The 50-day moving average, which neatly coincides with the upward trend line that forms the basis for the triangle, is acting as support against any sustained pullback in prices along with the 200-day moving average also trending higher below the price action. However, there are some signs that the NZD/USD pair is reaching an oversold region based on the climb in the Relative Strength Index. Should it rise past the 70.0 level once more, it could be an early indication of a pullback in prices before the resumption of the prevailing that has been intact since January. Additionally, further accommodation from the RBNZ or a rate hike signal from the Federal Reserve could spur a sudden downside reversal.

Looking Ahead

Trade data due later in the session from New Zealand should provide further evidence about the pace of economic activity in the nation, with the trade balance forecast to shift from surplus to deficit for July. Falling exports and rising imports may shift momentum in favor of the US dollar momentarily, however, it will depend on US housing data outperforming expectations near-term amid a bundle of questionable data points released over the past several weeks. Additionally, core durable goods orders and a second reading of second quarter GDP from the United States could move the needle on the US dollar. However, if the numbers come in below expectations, further delaying higher interest rates, the USD slump may persist, paving the way for NZD/USD to continue climbing over the near-term.