NZDUSD came off an 11-month high after the Reserve Bank of New Zealand (RBNZ) decided to increase their benchmark rate 25 bps to 2.75 percent as the stream of positive economic data continues. This was the first increase in rates since March 2011. The kiwi-dollar extended gains through .86 cents per US dollar before pulling back before the weekend on a broad market risk reversal. Although punching through, NZDUSD closed below a significant resistance level (breaks in resistance are not as significant as a close above).
Inflation remained below the RBNZ key target of two percent, coming in at 1.6 percent. Inflation has remained in a band range of two to four percent over the last decade with minor bouts below or above. However, since late 2011, inflation has remained below the central bank’s target levels.
“But one thing that does stop recoveries in small open economies is inflation getting out of control. It starts to undermine the growth in real incomes. It starts undermining the competitiveness of the economy. And that’s what we want to avoid. We want to move early. We want to contain inflation expectations and we want this recovery to go on for as long as possible,” said Wheeler. The central bank forecasted late last year that inflation would trend to two percent before dipping back below in early 2014. However, inflation has remained well below expectations.
RBNZ Governor Graham Wheeler said “we’ve just spiked the punch bowl,” referring to the old adage that central bankers remove the proverbial punch bowl as the party is started – or the economy begins to recover. Since the financial crisis, we’ve seen central banks prolong very accommodative monetary policies, including prolonged low interest rates, even after economies gain further traction (at least on paper).
Wheeler included that “there isn’t a central bank in the world that I know of, certainly including this one, that doesn’t think about the real economy, about the exchange rate and unemployment, when it is looking at monetary policy settings.” The RBNZ estimates that the economy expanded 3.3 percent over the last year and expects similar growth during the next fiscal year.
NZDUSD has had a near-parabolic move upwards since mid-February from the mid-.82 level and has trended well with the 20 EMA. Moving averages and trend strength are supporting the higher-highs on a technical basis, and New Zealand’s economic strength has supported price action fundamentally.
The daily chart shows the piercing of .86 to close out last week, but price action sold sharply, resulting in a 70 pip wick. NZDUSD is no stranger to long wicks, which should be considered on a volatility viewpoint, but the selling pressure is indicative of several factors: the price action has ventured into overbought territory with the RSI above 72. Also, the .8600 level will be regarded as one of those “psychological” resistance points.
Lastly, risk assets have been bought and sold at convenience, and traders are unwilling to hold onto riskier assets over the weekend as Crimea is likely to annex itself from Ukraine with heavy influence from Russia. There has been a report of Russian troops pushing further into Ukraine. This situation is unlikely to affect New Zealand directly, but geo-politic panic tends to group risk assets together.
Look for support at .8510 and .8440, while resistance will be found at .8540 and .8580. If resistance levels are broken, NZDUSD can reach .8630 before seeing resistance prior to the yearly high of .8675.