The two key events for antipodean traders this week, the FOMC and RBNZ meetings came and went earlier this morning. If the aim of both Central Banks was to create as little volatility as possible from these announcements, then both appear to have succeeded. That said the two Central Banks differing views of their respective economies, have sharpened the framework on one of our favourite medium-term macro and technical based trades, short NZDUSD.
First, to the U.S., as expected interest rates were raised again by 25bps to between 2.00-2.25%. This was the 3rd time interest rates have been raised during 2018 with a 4th hike highly probable before year end. The Fed took the opportunity to upgrade its estimates of GDP growth for 2018 and 2019 and for the first time the market was able to get a glimpse of dots out to 2021. The dots showed that interest rates are expected to reach a median of 3.375% in 2021, before the current tightening cycle ends. Catching the market by surprise, the 2021 dots also showed 3 Fed members expect rates to then be cut at some point soon after.
Perhaps in response to the latter development, U.S 10-year yields closed the day down 5.0bp to 3.05% while the 2-year yield dipped back to 2.815%. The U.S. dollar finished largely unchanged on the day. Curiously, given the move in dovish move rates and FX, U.S. equity indices closed the day lower, possibly due to end of month, end of quarter rebalancing.
In New Zealand, the RBNZ kept the official cash rate (OCR) on hold at 1.75%, also largely as expected. The tone of the accompanying statement was broadly unchanged from the dovish August MPS statement. While the RBNZ noted the stronger than expected Q2 GDP number released last week, it also reminded that “downside risks to growth outlook remain”. In a nutshell, the RBNZ expect the OCR to remain on hold at “an expansionary level for a considerable period”.
As can be viewed on the chart below the diverging path of interest rates between the two countries has been instrumental in guiding the NZDUSD lower in 2018. After this morning’s updates, the move in interest rates shows little sign of reversing.
In an article we wrote last week https://www.cityindex.com.au/market-analysis/nzdusd-testing-shorts/ it was suggested post the better than expected Q2 GDP to close NZDUSD short trades and to look for better levels to resell the NZDUSD. With the RBNZ and FOMC now out of the way, this remains the plan.
Turning to the conventional charts, there is a strong layer of resistance nearby at .6725 in the NZDUSD. However, with a still large short position in the market, I feel patience is required and the optimum level for shorting the NZDUSD is closer to the 38.2% Fibonacci at .6850. Therefore, I intend to use a bounce towards .6850 as an opportunity to re-sell the NZDUSD with a stop loss placed on a closing basis above the 50% Fibonacci at .6968. Should the short trade be entered, the profit target for the trade will be a retest of the September .6501 low.
Source Tradingview. The figures stated are as of the 8th of August 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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