Kiwi Dollar traded sharply lower today once more, extending the losses suffered yesterday. The instigator appears to be the weaker than expected Trade Balance (Aug) which came in at a NZD 1.1 Billion deficit vs an expected 722 Million gap. This 469 million miss is definitely a strong bearish number, considering that there have only been 4 other months since Jan 2007 where the under expectation was more than August’s miss. However, it should be noted that this is actually an improvement (in terms of expectations) from July’s stupendous 756M miss, which ranks number one in terms of misses since 2007 incidentally. Furthermore, market has over estimated Trade Balance figures for a whopping 56% of the time since 2007, suggesting that market should be used to seeing under expectation, and hence reduce the bearish impact this time round. Perhaps the strongest evidence against a strong bearish sentiment resulting from this latest print can be seen from the price action when the last release happened. Interestingly, NZD/USD actually traded HIGHER by the end of the day following one of the weakest Trade Balance print in recent history (in terms of absolute deficit gap and expectation miss), suggesting that there must be something more that is actually driving NZD/USD lower today.
Looking at yesterday’s price action, it feels as though that it is technicals that is driving prices more now. After confirming the break of 0.834, the additional bearish pressure pushed prices back down lower beyond the 0.8315 swing low of Asian session, resulting in further bearish acceleration which managed to breach 0.83 during US session. It is likely that technical bears basically took advantage of the negative Trade Balance to send prices towards the 0.824 – 0.825 resistance turned support. The fact that decline today stalled around the next immediate support zone is a good sign that it is indeed technicals that are calling the shots now.
With this in mind, we can continue to expect further technical interference in the short-term. Prices is expected to rebound higher but any corrective rally from here will most likely be stopped by the top of the narrowing wedge and confluence with the soft support of 0.8265 – 0.827. Should 0.824- 0.825 is broken, prices may most likely find support via the lower end of the consolidation found on 18th Sept. This is echoed by Stochastic indicator which is close to the Oversold region and will most likely be within the Oversold zone should prices hit close to 0.82.
The case for a bearish pullback is also strong from the Weekly Chart. Stochastic readings are Overbought with the Stoch curve tapering lower, while current decline affirms the 0.85 ceiling and will open up the Channel Top below as a reasonable pullback target should price close around where we are this week.
Fundamentally, Kiwi dollar is expected to appreciate due to RBNZ’s intent to raise rates in 2014. However we may find it hard to see clean bullish direction in NZD/USD as USD is also experiencing one of the most bullish cycle since the start of the financial crisis. As such, we may continue to see technicals making the difference as traders ponder about which driver is more important in the long run. The implication of this is that prices may simply stay within the 0.81/Channel Top and 0.85, in similar fashion to what we’ve seen between June and August 2013.
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