The Reserve Bank of New Zealand kept its Official Cash Rate (OCR) at 2.50%, but Governor Wheeler maintained his dovish stance, saying that NZD remains overvalued despite trading under 0.80 US cents per NZ Dollar. Wheeler said that the Central Bank will continue to look for opportunities to “take the tops off any exchange-rate peak” before engaging in direct intervention (e.g. selling NZD in the open market). This sparked NZD to trade lower post announcement as traders believe that RBNZ will seek to trim any corrective rallies (which we are currently in as shown by the Hourly Chart below).
Besides the threat of further intervention, RBNZ has downgraded GDP forecast from 3.3% to a 3.0%, not a shabby percentage by any means but negative sentiments surrounding NZD were understandably invoked when faced with such downgrades. Also, from an economy standpoint, the non-stopping escalation in house prices is a ticking time bomb that may result in a strong negative cascade of the economic health in NZ should the bubble burst eventually. With such depressing outlook, with 2014-2015 growth expected to be lower at 2.8%, it is not surprising that even fundamental traders favors a weaker NZD moving forward.
From a technical point of view, it seems the the bearish reaction from RBNZ was still relatively muted, with support found around 0.795. Price recovered gingerly and was trading steadily higher after stabilizing, but the failure to trade above 0.796 convincingly proved fatal as price tanked when risk aversion took hold during Asian trade, with stocks trading sharply lower led by Nikkei which fell more than 5%. The “risk-off” sentiment pushed NZD lower, with 0.791 interim support holding. Price has also broken below the rising trendline which characterized the recovery rally that started 2 days ago, increasing bearish pressure that will help bears to break the 0.791 support.
Stochastic readings are currently pointing lower but we’re closing in on the Oversold region. This suggest that price may still be able to break the 0.791 support or perhaps even 0.79 round figure, but heading lower beyond 0.786 may be a bit harder on a single move without any sort of pullbacks along the way.
Weekly Chart is less bearish, with a Spinning Top candlestick forming. As mentioned previously, multi-year trendlines are less precise as a small shift in initial angle can result in a potential difference of 20-30 pips. As such, strong confirmation signals will be needed to affirm the breakout of the multi-year trendline. A Spinning Top which represent indecision/uncertainty does not cut it, and in fact may suggest that the multi-year trendline is holding.
If the multi-year trendline holds, we could actually see a full reversal of sentiment from bearish to bullish easily. RBNZ has indicated that they “wouldn’t try to become engaged and try to offset those (strong capital flows) in any substantive way”, meaning that if major trends turn higher, they will cease selling NZD, which would essentially mean that the dovish undertone of RBNZ is over since they can’t risk cutting rates without further fueling the housing bubble. Hence the next few weeks become extremely important for the direction of NZD/USD in 2013. A strong trend is bound to emerge either way soon.
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