NZD/USD Outlook Clouded By H&S Formation Ahead Of RBNZ

Talking Points:

- NZD/USD Outlook Clouded by Head-and-Shoulders Formation; All Eyes on RBNZ.

- USDOLLAR Carves Larger Recovery Following Strong NFP Report.

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NZD/USD

Chart - Created Using FXCM Marketscope 2.0

• NZD/USD may continue to give back the advance from the end of July as the pair appears to be carving a head-and-shoulders formation following the failed attempt to break above the Fibonacci overlap around 0.7330 (38.2% retracement) to 0.7340 (61.8% expansion), while the Reserve Bank of New Zealand (RBNZ) is widely anticipated to reduce the benchmark interest rate by 25bp at the next policy meeting on August 11.
• With Overnight Index Swaps (OIS) calling for 50pb worth of rate-cuts over the next 12-months, a rate-cut accompanied by a dovish policy statement may spark a sell-off in the New Zealand dollar as Governor Graeme Wheeler warns ‘further policy easing will be required to ensure that future average inflation settles near the middle of the target range.’
• Will keep a close eye on the downside targets as NZD/USD appears to be carving a right-shoulder in August, with the first area of interest coming in around 0.7050 (78.6% retracement) to 0.7070 (23.6% expansion) followed by 0.6950 (38.2% retracement) to 0.6980 (38.2% expansion).

• The DailyFX Speculative Sentiment Index (SSI) shows the retail FX crowd flipped back net-short NZD/USD on July 28, with the ratio hitting an extreme reading during the previous month as it slipped to -2.58.
• The ratio currently sits at -1.44 as 41% of traders are long, with short positions narrowing 13.3% from the previous week as open interest stands 10.0% below the monthly average.

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USDOLLAR(Ticker: USDollar):

Chart - Created Using FXCM Marketscope 2.0

• The USDOLLAR extends the advance from earlier this week and crosses back above former-support around 11,951 (38.2% expansion) to 11,965 (23.6% retracement) following the 255K expansion in U.S. Non-Farm Payrolls (NFP), with the greenback at risk for a larger recovery as the data print boosts interest-rate expectations.
• Strong job growth accompanied by the pickup in the Labor Force Participation Rate may put increased pressure on the Federal Open Market Committee (FOMC) to raise the benchmark interest rate in 2016, but Chair Janet Yellen may largely endorse a wait-and-see approach for monetary policy at the Fed’s Economic Symposium in Jackson Hole, Wyoming as central bank officials continue to argue ‘market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.’
• The USDOLLAR appears to be testing former-support around 11,951 (38.2% expansion) to 11,965 (23.6% retracement) for new resistance, with a failed attempt to close above the Fibonacci overlap to encourage a bearish outlook for the greenback.

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