Yesterday’s rally inspired by a stronger Chinese Yuan has been burnt out by more news of drought in New Zealand. Local headlines are filled with more reports about the ongoing heat wave plaguing the food exporting nation. Temperatures have rose to 10 year highs, at the same time sending Kiwi to its 6 week low against neighboring Aussie.
The rally and the subsequent fall in prices fit nicely within the descending channel put in place since 7th Mar. Price has found interim support around 0.824 with Stochastic reading bottoming out. However, this interim support may be easily broken and traders may find further support along Channel Bottom and the consolidation region between 0.82-0.822.
0.82 is still intact despite the overall bearishness. However, the descending trendline indicates that a return to bullish bias within the short-term may be difficult. Stochastic is more optimistic with readings appearing to bottoming, but we still have some distance to go with regards considering the previous trough back in Dec.
New Zealand Finance Minister English said yesterday that the drought will impact negatively on growth. With Chinese domestic demand falling, it will be hard for NZ producers to simply hike up their prices to pass on the cost of drought to foreign consumers. Despite all these issues, 100% of economists surveyed by Bloomberg believe that Reserve Bank of New Zealand will keep borrowing cost unchanged tomorrow, which may provide short-term bullish relief to the Kiwi. However that may actually be long-term bearish for NZD/USD as it would mean that producers are left to face the drought without any assistance. On the flip side, a rate cut may be short-term bearish, but long-term bullish if market choose to place more weight on NZD long-term economic fundamentals. Hence traders should prepare themselves for any strong pull-back reactions after the initial news movement rather than simply treat the initial reaction as a confirmation of breakouts.
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