The NZD/USD pair finds it challenging to sustain upward movement after a slight recovery from near the 0.6100 mark, recorded as the lowest in over a week.
During the Asian trading session on Wednesday, selling pressure resurfaced. At present, the pair is hovering around 0.6135, reflecting a 0.10% decline for the day. Nevertheless, substantial selling is absent, possibly due to the subdued demand for the US Dollar.
USD weakens amid Fed rate cut expectations
The USD Index, which tracks the US Dollar against other major currencies, remains close to its low point for the week, reached yesterday. This drop is due to growing expectations that the Federal Reserve may cut interest rates soon.
Recent weaker US Retail Sales numbers suggest that American consumers might be slowing down. This idea is supported by last week's poor data on US consumer and producer prices, making people believe that the Fed could begin cutting rates as early as September.
The positive mood in global stock markets is pushing down the safe-haven US Dollar. This could help the risk-sensitive New Zealand Dollar. But, China's economic recovery is showing mixed results, adding to uncertainty for the NZD. Paul Conway, Chief Economist of the Reserve Bank of New Zealand, recently made comments that have also put pressure on the NZD/USD pair.
Conway suggested that while inflation might stay high in the short term, it could drop faster than expected in the medium term. This could make bullish traders cautious as they wait for the New Zealand Q1 GDP data coming out on Thursday. During this time, USD price changes might still impact the NZD/USD pair, especially since there’s little economic data and lighter trading due to the US bank holiday on Wednesday.
PBOC eases Yuan control
On Thursday, the People’s Bank of China made a decision to ease control over the Chinese yuan. As a result, the USD/CNH surged to levels not seen since late 2023. This ongoing trend could significantly impact global markets, especially emerging markets and other Asian currencies.
The USD/CNH pair slowly climbed along the trendline support over several weeks before finally breaking through it. This pattern attracted buyers whenever prices dropped close to or below the 200-day moving average.
On Wednesday, the NZD/USD pair managed to push and close above the 7.2800 mark. This upward movement continued on Thursday after the PBOC set the onshore yuan's starting point at 7.1192, marking the weakest fixing since November. This also represented the largest deviation from the previous session's starting point since mid-April.
The PBOC has set the USD/CNY exchange rate at a marginally stronger level. However, in contrast to earlier this year, it has refrained from taking strong measures to counteract the yuan's depreciation. This current approach differs significantly from past instances when the PBOC intervened more forcefully.
In June, before the adjustment, the PBOC left both one-year and five-year benchmark lending rates unchanged. This decision aligns with market expectations. Beijing's hesitation to reduce borrowing costs highlights its concerns over potential capital outflows that could further depreciate the currency.
Reflecting the price movement, indicators such as RSI and MACD suggest a growing upward momentum. Unless we see solid proof that the US Federal Reserve is planning rate cuts, this trend is likely to continue.
If you're looking to go long, consider entering at these levels or slightly lower. Place a stop just below 7.2780 for safety. Aim for an initial target of 7.3100, which was the high reached in November last year.
On the fundamental side, the main concerns for this trade are twofold. First, if the PBOC takes sudden, strong action to combat the weakening yuan. Second, a significant rise in US initial jobless claims could bring the Federal Reserve's anticipated first rate cut forward.