Kiwi Dollar gaped higher this morning due to bullish news over the weekend that supported risk assets across board. Chinese PMI number is the first, coming in at 51.0, the strongest we’ve seen since April 2012. On top of this, Obama’s decision to defer to Congress’s decision on Syria suggest decreases the odds of an upcoming war. This drove USD lower further, sending NZD/USD to the 0.777 support-turned-resistance during the first few hours of trade.
However, what followed subsequently can only be attributed to the underlying strength of bulls. Fundamentally, we actually had bearish news just when price tried to break the confluence of descending Channel Top and the aforementioned 0.777 level. The HSBC Manufacturing PMI for August came in at 50.1, lower than the expected 50.2. Some traders may point to the fact that this print is higher than previous month’s 47.7, but as this is the “Final” print, and not a flash estimate, the penalty of missing expectations tend to be larger, and hence we should have seen NZD/USD pushing lower instead of climbing higher. The fact that prices managed to break away from the Channel is a huge sign that price is highly bullish, and a test of 0.78 becomes that much more likely.
However, with the overall short-term pressure still remaining bearish, an extremely Overbought Stochastic reading does dampen the bullish spirit, and price would actually need to clear above 0.784 and preferably 0.787 in order for true bullishness to take shape. In the meanwhile, even if 0.78 is broken, we could still see some pullbacks towards 0.78 again.
Weekly Chart shows price trying to test the Multi-Year support Channel. Noting how prices have been highly volatile around current levels, it is important that traders do not mistake volatility as a break into the Channel, with Channel Top/0.81 as bullish target. Stochastic readings continues to favor downsides as well, with readings pointing lower sharply after topping last week. This is not without precedent, with similar troughs seen back in November 2011. Prices were also around current levels, leading to a low of 0.737 before rebounding back. This bearish objective fits nicely with where we are currently as well. If Channel Bottom holds up, a move towards 0.737 will be the ultimate the bearish target this time round as well. Price should preferably push below 0.768 which is the 2013 low, below which we should be able to see strong bearish conviction to lead us lower.
Fundamentally speaking, the USD weakness that has drove NZD/USD higher should only be a temporary move, as USD is slated to strengthen in the long run considering the tapering plan to cut QE entirely in 2014. Even if September FOMC event turns out to be a dud, the resultant USD weakness from the event will also only be temporary. The only way for NZD/USD to climb would be a resurgence of New Zealand’s economy, which is highly linked to China. Despite latest Chinese PMI Manufacturing numbers came in much higher than expected, official numbers from China has always been suspect at best given the “optimism” of Chinese official data gatherer. HSBC/Markit numbers are lower, and may be closer to the truth. As such, New Zealand need to somehow increase exports despite an expected decline from China, making it unlikely for NZD/USD to climb back to the high 0.80s without any significant shift in fundamentals from either US, China or within New Zealand.
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