Currency Pair of the Week: NZD/USD

This week, the RBNZ will take its turn at hiking rates and discussing its outlook on inflation.

FOREX 3

The Reserve Bank of New Zealand meets on Wednesday this week to discuss Monetary Policy.  Expectations are that the central bank will raise interest rates by 50bps from 1.5% to 2%. At the last meeting in April, the committee surprised the markets by hiking 50bps vs expectations of only a 25bps hike. The RBNZ cited the reason for the hike as the “path of least regret”, as inflation remains stubbornly high.  The central bank noted that it expects inflation to peak in the first half of 2022 around 7%.  The Q1 CPI, which was released after the last RBNZ meeting, was 6.9% YoY vs 5.9% YoY in Q4.  Watch for comments regarding inflation expectations and whether the central bank believes that inflation will continue to rise into Q3.  In addition, the recent Q1 Unemployment Rate, released in May, remained unchanged at 3.2%, an all-time low.  Therefore, the RBNZ may have some room to work with if members want to raise rates at the expense of employment.  On Tuesday, New Zealand will report Q1 Retail Sales.  Expectations are for a print of -1% vs a Q4 reading of +8.6%!  This will be an important metric to gauge whether consumers are feeling the pinch for higher inflation. 

How do interest rates impact financial markets?

The highlight of the week for the US will be the FOMC minutes on Thursday.  As the last FOMC meeting, members voted to hike interest rates by 50bps, bringing the Fed Funds rate to 1%.  In the press conference that followed, Chairman Powell took a 75bps hike off the table and said it was not something the committee was actively considering.  Will the Minutes show this to be true?  Since then, central bank members have been on the wire touting the possibility of another 50bps hike at the June meeting.  In addition, some have suggested that a 50bps rate hike at the July meeting would be appropriate as well.  This would be followed by a review on inflation in September to determine if the rate increases are indeed slowing the rise in inflation.  Lowering inflation is the Fed’s number one concern.  Powell even has suggested that he would be willing to do it at the expense of the 3.6% Unemployment Rate!  The US will also release its Core PCE Price Index at the end of the week.  This is considered by many to be the Fed’s favorite measure of inflation.  Expectations are for a print of 4.9% vs a March reading of 5.2%. Although it would still be elevated, the Fed would be relieved to see any results that are weaker than the previous reading.

Everything you need to know about the Federal Reserve

On a weekly timeframe, NZD/USD had been moving lower.  After making a high during the week of February 22nd, 2021 at 0.7465, the pair began moving lower in an orderly channel.  During the week of January 24th, NZD/USD posted a false breakdown below the channel near 0.6529, only to bounce and retest the top trendline of the channel near 0.7000.  The pair moved lower once again, breaking below the bottom trendline of the channel and moving to support at the 61.8% Fibonacci retracement level from the March 2020 pandemic lows to the February 2021 highs, near 0.6231.  NZD/USD has since bounced and is looking to retest the underside of the bottom trendline of the channel.

20220523 nzdusd weekly ci

Source: Tradingview, Stone X

 

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On a daily timeframe, there is a strong confluence of resistance at the bottom of the downward sloping channel, horizontal resistance and the 38.2% Fibonacci retracement level from the highs of April 5th to the low of May 12th, between 0.6529 and 0.6568.  Above there, NZD/USD can move to the 50% retracement level from the same timeframe near 0.6625, then the 50 Day Moving Average at 0.6670.  If the recent bounce in price proves to be a correction in the downtrend, first horizontal support is at 0.6291, then the lows from May 12th at 0.6276.  Below there, horizontal support from April 2020 crosses at 0.6176.

20220523 nzdusd daily ci

Source: Tradingview, Stone X

This week, the RBNZ will take its turn at hiking rates and discussing its outlook on inflation.  In addition, the US will release the FOMC Minutes from the early May meeting.  Will they prove to be as hawkish as some Fed members seem to be now?  In addition, watch on Friday for the Fed’s favorite measure of inflation, the Core PCE Price Index.

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