22 July, AtoZForex – In the Economic Update published on Thursday, the Reserve Bank of New Zealand (RBNZ) signaled strong easing bias, and dovish shift in its views on domestic growth and inflation expectations. At the centre of these concern is elevated NZD.
RBNZ rate cut is imminent
The local currency was trading 6% above the RBNZ’s forecast, the bank even stated that “a decline in the exchange rate is needed.” This further bolsters expectations of RBNZ rate cut.
In addition, expensive NZD adds downward pressure on the currency, “and we promote long AUDNZD positions and short NZDCAD,” Morgan Stanley noted. The risk-supportive fiscal easing expectations from BoJ in Japan could add some upside for AUD as the financial markets are not pricing in as much easing from the RBA. At least until Australia’s inflation print at the end of the month.
In Goldman Sachs view, the Economic Updates make clear that the RBNZ is preparing for a deeper easing cycle, notwithstanding remaining risks to financial stability from increasing house prices.
Overall, Goldman Sachs now expects the RBNZ to “cut rates on three further occasions in August 2016 (-25bp), November 2016 (-25bp) and March 2017 (-25bp). This implies the OCR will finish this cycle at a low of 1.50% (-50bp lower than our previous forecast).”
The investment bank continues to forecast NZDUSD at 0.68, 0.64, 0.62 in 3, 6 and 12 months respectively.
Technical NZDUSD analysis
From a technical perspective, the current NZDUSD movement can be view as just a correction within a broad upward trend.
At the moment the price rests on a major Fibonacci 61.8% retracement level at 0.697. With daily MACD at a neutral 0 level, a bounce from the major level is likely and a consolidation between the 0.697 and 0.705 would not be surprising.
Having said that, a clear break below the Fibonacci 61.8% retracement level would indicate a deeper correction towards an initial target at 0.692 Fibonacci 50% retracement level and possibly to Fibonacci 31.8% retracement level at 0.686.
Meanwhile, a break above 0.710 would warn of an end to the ongoing bearish correction.
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