The New Zealand dollar has been on a tear over the last few months. The optimistic fundamentals and back-to-back increases in the benchmark interest rate has kept demand high. However, the Reserve Bank of New Zealand (RBNZ) has threatened to sell New Zealand dollars and intervene in the foreign exchange market.
RBNZ Governor Graham Wheeler said that a high exchange rate in the wake of weakening fundamentals could trigger central bank action. This week’s fundamental data was discouraging. The unemployment rate remained at six percent in April, while analysts were forecasting a drop to 5.8 percent. The quarter-over-quarter employment gauge fell to .9 percent, lower than the March’s downward revised one percent (from 1.1 percent). This did, however, beat forecasts of a decline to .6 percent. Whole milk powder prices declined for a six straight auction – dairy being New Zealand’s largest export.
“Today’s comments, and the dairy auction results, should keep the New Zealand dollar under some pressure,” said James McIntrye, senior economist at Commonwealth Bank of Australia. McIntyre believes that it is unlikely the central bank would step in, and, even if it does, past interventions proved to be not effective.
The kiwi has seen nearly 700 pips to the upside against the US dollar since early February, as traders became bullish on both fundamentals and higher interest rates. Price action has pulled back from today’s high of .8779 to just above .8700 on the weaker fundamentals. Furthermore, the NZDUSD is coming closer to the three-year high of .8841. Weaker fundamentals, both in New Zealand and China (where the primary bulk of dairy exports has been going) could be foreboding. Without a catalyst to overtake the multi-year high could trigger a double top sell-off.
Price action is currently above resistance at .8679, but a close beneath could signal a retracement lower to .8575/.8600 support zone. The weekly chart’s momentum is strong with the ADX above 30 and the + DMI above 24. However, the RSI is approaching resistance on the extending weekly chart that could suggest a pullback, if not a period of consolidation. Stronger resistance will be found at .8800.