The Kiwi dollar took an absolute beating today thanks to RBNZ’s Wheeler’s speech titled “Explaining the Role of Macro-Prudential Policy” in Wellington. Funnily, in his speech which is supposed to provide more insights on why prudence should be exercised with regards to monetary policies and economic planning, Wheeler went totally off topic to discuss NZD, which he said is “Overvalued”, sending NZD/USD lower on the get-go. Wheeler continued on topic, but barely, when he introduced new policies that will be imposed soon. Starting 1st October, RBNZ will be capping low-deposit loans at 10% of new mortgages, aiming to slow down the growth in housing market. This initiative stems out from the “prudence” mindset, which seeks to decrease inflation and bubbling risks which has shackled RBNZ from any rate cutting actions in order to drive down the Kiwi. It seems that Wheeler is using this speech as a vehicle to talk more about upcoming plans rather than giving a theory session of the benefits of “macro-prudential” policy making as the subject title suggest.
In any case, market is only interested in the content of Wheeler’s speech, not whether he a good speaker he maketh. By actively trying to stymie the growth of housing prices, RBNZ will be able to afford more scope to artificially push NZD lower with less worry on the inflation risk. It is also interesting to note that in a forum where prudence is the main topic at hand, there is scant mention of the Official Cash Rate, which Wheeler has stated previously that RBNZ would not be altering in 2013, and may even hike it in 2014. If Governor Wheeler is truly interested in prudent policy making, he should have reaffirm markets that rate hikes will happen eventually, similar to how Fed is taking about an eventual QE taper. This argument from silence suggest that Wheeler may still be dovish despite all the talk of prudence, and hence it is likely that should housing prices manage to slow down, RBNZ may strike hard and furious to bring NZD lower.
Market agrees, with NZD/USD pushing sharply lower from 0.807 pre speech to below 0.80 after. Sentiment is so bearish such that price remained below 0.80 despite a higher RBNZ 2 year inflation expectation that has just been released at the time of writing. From a technical perspective, current sell-off is so aggressive such that the rally from 14th August has been invalidated, while Stochastic Oversold status is basically ignored. Despite all these strong bearish sign, perhaps the most important bearish breakthrough within the past 24 hours is actually yesterday’s Channel Breakout during early US session.
NZD/USD faced strong resistance above 0.815 despite breaking above the 0.81 level last Friday. It was already noted yesterday that bullish impetus is weak despite such an important breakout, but it should be noted as well that such a comprehensive deconstruction of bullish pressure was not really expected. Prices broke Channel Bottom, and went through 0.810 as through it didn’t exists before finding support above 0.805. Perhaps 0.805 would have been held if not for Wheeler’s speech today, but this point is already moot; current initiative goes to the bears and we could see further movement lower towards 14th Aug swing low if bears have their way.
Longer-term perspective suggest an even larger swing move towards 0.77~. Previous 2 rejections of 0.81 has resulted in prices hitting the support band between 0.77 – 0.78, and we could find ourselves here again in the next few weeks especially if Fed Tapering fears continue to rise, resulting in stronger USD and hence lower NZD/USD. Furthermore, RBNZ has openly declared their intention to intervene via NZD secondary market selling whenever direction is in their favor. If 0.80 is broken, it is likely that RBNZ will want to drive Kiwi Dollar down the same swing low target mentioned earlier, potentially giving us faster acceleration to our bearish target.
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