The New Zealand dollar tentatively retreated from key resistance around the .7736 area on Wednesday. The short-term retreat occurs after a two-month long trading range consolidation where price stabilized and respected the .7200 handle.
Earlier in the year, price fell to a near 4 year low after the RBNZ said that rates will stay steady for some time and that they are anticipating the kiwi to have a “further significant depreciation”. Recent data and RBNZ comments however may help the currency pair make an attempt at the .70 handle over the next couple of months.
Last night, Reserve Bank Assistant Governor John McDermott said, “Evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates.” A Bloomberg survey of 10 economist show that there is a 57% chance of a rate by the end of the year.
A plunge in Chinese economic data may also weigh on economic growth for New Zealand and that could support a deeper fall with the New Zealand dollar. Last night, a Chinese HSBC Flash Manufacturing fell to a 12-month low at 49.2, the second consecutive reading below the 50 level. If this contraction continues, we could see kiwi-dollar drop off considerably.
Price action on the NZD/USD daily chart shows that price appears poised to drop below both the 50- and 100-day SMAs. If the bearish stance generates a daily close below the .7500 handle, price could slide down towards the .7350 zone.
If we do see a rebound, .7700 will serve as key resistance. Only consecutive daily closes above that region would signal a potential pause with the bearish bias.
The trade: Sell NZDUSD at .7575 with a stop loss at .7375 and a take profit at .7625. The Risk/Reward Ratio is 1:4.
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading