NZD/USD Drops Sharply Towards Critical Support

A continuation higher in the Greenback has weighed heavy on NZD/USD with the Kiwi Dollar posting the largest losses among the majors shortly ahead of the European close. The currency pair is down 1% on the day, and nearing major support that will ultimately provide a clear near to medium-term directional bias for the pair.

The US Dollar index (DXY) extended higher to completely erase losses from Friday’s US Jobs report, briefly posting a seven-month high. Resistance at 97.35 reflects the highest close in July, the index was last seen trading at 97.49 for a gain of 0.63%. A sustained break above 97.35 in the form of a daily close would further fuel the current rally, putting the trend in NZD/USD from the start of the year at risk.

NZD/USD has been correcting lower from highs posted in early September, with momentum picking up last week following a technical break. The broader outlook for the pair, however, continues to point an uptrend.

On a daily chart, NZD/USD remains above a rising channel and has been posting a succession of higher highs and higher lows from the start of the year. With strong momentum behind the current decline, there is a good possibility that the pair will test strong support this week.

Support in the pair is seen at 0.6991. The level had held the exchange rate higher in mid-June, late June and once again in late July. With the close proximity of the level to the psychological 0.7000 handle and the lower line of the rising channel, the currency pair stands to provide a clear reversal signal from the broader trend throughout 2016, if a technical break materializes.

Similar to last week, the Dollar has been strengthening early in the week, with a relatively light economic calendar. Recent communication from the Federal Reserve has provided a clear viewpoint of the central bank’s stance on monetary policy. With the US presidential election nearing, the Greenback stands to fluctuate based on public perception and speculation of who the new leader of the United States will be.

Risk sentiment has played a role in the Kiwi Dollar decline today. Equity markets in the United States are seen moving lower with the S&P 500 posting a gap down at the open, followed by a steady stream of selling. The index was seen trading at 2,140 ahead of the lunch break, for a notable loss of 1.08%.

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New Zealand - Food Price index for September: -0.9% m/m (prior +1.3)

New Zealand data from earlier today:

• New Zealand - BusinessNZ Manufacturing PMI (September): 57.7 (prior 55.1)
  
• New Zealand - ANZ job ads for September: +0.3% m/m (prior +3.1%)
  

• Unilever, which owns brands including PG Tips, Ben & Jerry's ice cream and Persil, ... demanded price rises of 10 per cent, blaming the falling value of the pound.

• One of Britain's biggest supermarkets is running low on everyday household items after Tesco refused to bow to demands

New Zealand - Services PMI (September): 54.1 (prior 57.9)

September BNZ - BusinessNZ Performance of Services Index from NZ

• "A number of those who provided negative comments tended to focus on current weather conditions, as well as school holidays affecting operations.
• This culminated in the proportion of negative comments rising from 34.8% in August to 39.3% in September."

• "looking through the monthly volatility, there has been some trend slowing in the PSI over recent months.
• It appears firm's difficulty in finding staff is one of the obviously many factors involved".

New Zealand Q3 CPI: 0.2% q/q (vs. expected 0.0%)

Westpac likes the NZD: "Buying NZD/CHF thus seems to be the safer bet"

From the latest Westpac "High Conviction FX Trades"

AUD and NZD ...  our model, macro and technical signals pushing strongly back in their favour 

Aussie's domestic fundamentals are strong

• Fading pricing for an RBA easing
• Steady growth
• Diminished terms of trade drag (Australia's commodity export price basket at its highest levels since Nov 2014)

New Zealand:

• Activity remains strong across almost all sectors
• Confidence among businesses and consumers is high
• Dairy sector is seeing green shoots (pace of price gains remains more muted)

Westpac's model "goes long NZD in a big way, +26.8% of the portfolio"

• Against the USD, NZD suffers from a declining interest rate advantage, likely to narrow even more
• We remain upbeat on the USD
• Buying NZD/CHF thus seems to be the safer bet, our process much more negative CHF than USD (see table below).  
• We buy NZD/CHF at 0.7080, stop 0.6995
  

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In brief, the banks "High Conviction Trades" blends recommendations from our G10 FX quant model, macro analysis and technical analysis.

New Zealand September Net Migration: +6340 (prior +5600)

Immigration to NZ is said to be a driver of house price inflation

• A record 70,000 net inflow of migrants in the year to September 2016

NZD/USD forecast for the week of October 24, 2016

The New Zealand dollar initially tried to rally during the course of the week, but found the area above the 0.72 level be far too resistive. By doing that, the market turned right back around to form a shooting star. Ultimately, if we can break down below the uptrend line, it’s likely that we could reach towards the 0.70 level below, which I think is somewhat supportive. If we break down below there, then this market could really start to break down. Alternately, if we broke above the top of the shooting star it could be a very bullish sign and have buyers returning.

New Zealand Dollar Exchange Rate: Forecasted Lower Against US Dollar (NOT Pound Sterling) Say BNZ Analysts

Latest predictions and NZ Dollar (NZD rate forecasts for the near, medium and long-term outlooks

• The Pound to New Zealand Dollar exchange rate today (23/10/16): 1.70964.
• The New Zealand Dollar to Pound exchange rate today: 0.58492.
• The US Dollar to New Zealand Dollar exchange rate today: 1.39665.
• The New Zealand Dollar to US Dollar exchange rate today: 0.71600.
• GBP/NZD set to see further losses, BNZ "not convinced that it has fallen by enough"

Inflation shows no signs of improving. The consumer price index in the third quarter rose by a dismal 0.2%, compared to the 0.4% rise in the previous quarter. This is the eighth straight quarter that the inflation has remained below the RBNZ’s target band of 1-3%.

While the housing-related prices came in higher, lower petrol prices were a dampener.

However, what gives confidence to the economists is that the increase in the CPI is 0.8% annually, if petrol prices are excluded.

Economists expect the RBNZ Governor Graeme Wheeler to cut the official cash rate in the next review on November 10. The futures are pricing in an 80% probability of a rate cut.

One OCR cut is likely

In a recent speech, RBNZ Assistant Governor John McDermott said the bank's “current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range”.

Reasons for low inflation

McDermott said that the central bank’s focus is the medium-term inflation, it doesn’t focus on the near term figures.

The sharp drop in oil prices and one-off reductions in the government charges have led to low inflation in the near-term and these will pass out of annual figures.

Thereafter, inflation is likely to pick up to the bottom of the RBNZ’s target range in the December quarter “as previous petrol price declines drop out of the annual calculations and housing-related goods and services prices continue to increase strongly.”

Secondly, the global recovery has been weak, even with the massive monetary policy support. Global demand is weak, which has led to soft prices of internationally traded goods. Hence, import prices in New Zealand have remained low. The RBNZ cannot control these issues.

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RBNZ will be publishing interest rate projections from November

The Reserve Bank of New Zealand  announcing they are to replace their projections of the 90-day bill yield with projections for the Official Cash Rate

NZ data - International tourism’s contribution to total exports has surpassed dairy

Data from Statistics New Zealand today on tourism spending in the counrty

• International tourism continues to be a significant export earner for New Zealand compared with other traditional export products
• In the year ended March 2016, international tourism's contribution to total exports was $14.5 billion (20.7 percent of exports). It has surpassed the export receipts from dairy products, including casein which totalled $12.3 billion (17.6 percent of exports) for the first time since 2010.