Kiwi Dollar traded lower this morning following the decline in Asian equities. However, this decline is interesting as Asian risk off climate was led by the risk aversion sentiment seen during US session yesterday when S&P 500 succumbed 1.26%. Strangely, NZD/USD did not decline but instead traded higher when US stocks were getting slaughtered, suggesting that the bearish reaction towards Asian risk off sentiment may be overstretched, given that NZ stock prices aren’t as bearish as US to begin with (NZ10G -0.92%, NZ50 -0.68%) and coupled with a stronger NZIER Business Opinion Survey result that NZD/USD traders have seemingly ignored.
If the above assertion is correct, then the likelihood of prices shrugging this morning’s decline off and head towards 0.84 increases. Looking at technicals, it seems that prices have already started to revert back higher, with 0.836 support holding nicely. Negative gradient of Stoch curve has also tapered significantly, with readings potentially reversing without entering the Oversold region. There has been precedence back last Friday, and hence it should not be too surprising if a bullish reversal does happen here.
Bullish potential on the Daily Chart is limited even though prices have not suffered any visible pullback ever since the NFP rally. Nonetheless, the likelihood of breaking 0.84 is not high considering the strength that it has exhibit in 2H 2013 coupled with the fact that Stochastic readings are deep within the Overbought region. Hence, a move towards 0.815 is favored, but price should trade below soft support of 0.835 and preferably push below 0.832 (looking at hourly chart) before strong bearish conviction can be ascertained.
Fundamentally, NZD remains primed for rallies given that RBNZ has explicitly stated that they will start hiking rates in 2014 to early 2016. However, USD is similarly on an upward trajectory due to the certain end of QE in 2015 if not 2014. Hence, it is difficult to determine whether NZD will trump USD or the other way round. Hence, the continued sideways trend between 0.815 – 084 may be more likely moving forward given the lack of strong directionality.
This would also mean that a move towards 0.815 in the short/mid term is more possible especially given that the reason for current rally is due to temporary USD weakness arising from speculators believing that QE taper number 2 will not happen so soon. This may be true, but the implication of a weaker USD may not be be reasonable as taper number 2 will definitely happen unless US economy starts to collapse out of nowhere (and there isn’t any evidence that it is happening right now). Hence, a correction of USD can be reasonably expected which will drag NZD/USD lower on top of the technical pressures that price is facing right now.