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NZDUSD: Down goes the Kiwi

16 July, 2014

By Jameel Ahmad, Chief Market Analyst at FXTM

Well, the penny for this pair has finally dropped. After the NZDUSD surpassed the psychological 0.88 valuation around one week ago, the 0.8840 August 2011 high seemed to be within touching distance. As the old saying goes, so close but no cigar. Additionally, the Reserve Bank of New Zealand (RBNZ) might also be inclined to add, we told you so.

At the time of writing, the NZDUSD had dropped over 100 pips since Tuesday’s opening price in response to Tuesday evening’s CPI (inflation) reading which fell below expectations. High inflation levels have been a major contributing factor behind the RBNZ’s decision to hike interest rates for the past three consecutive months. Back in May, when the RBNZ threatened to implement currency intervention, the central bank were explicit in stating that an already appreciated New Zealand currency would likely become detrimental to both their fundamental performances, alongside inflation levels.

However, after the RBNZ increased interest rates for the third consecutive month in June, the Central Bank hinted that further interest rates hikes in the upcoming months were likely. For this reason, investors continued to purchase the New Zealand currency.

Now that New Zealand’s inflation levels have fallen below expectations, doubts regarding whether the RBNZ will raise rates on the 23rd July have started to materialize. According to Bloomberg, the chances of a further interest rate hike from the RBNZ in July have already been reduced from 93% ahead of the inflation report, to 77% as of 3:43am GMT on Wednesday morning.

As mentioned above, the next RBNZ interest rate decision will be announced on the 23rd July and this means that we can expect further movement in the NZDUSD currency pair until the Central Banks’s interest rate decision. Investors will likely continue to deliberate over whether the New Zealand central bank will actually raise interest rates next week.

In regards to the NZDUSD technicals on the Daily timeframe, the disappointing New Zealand CPI reading encouraged a clean break of a 3-month bullish trend line. Both the RSI and Stochastic Oscillator are currently pointing aggressively downwards and as long as investors continue to reduce expectations for the RBNZ to raise rates, this bearish momentum is likely to continue. Further downside moves will likely find support situated around 0.8653 and 0.8613.

Of course, there is also the possibility speculation will emerge that the RBNZ will continue to tighten monetary policy. Either way, this pair will be fun to watch over the next week.

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