New Zealand dollar outlook: NZD/USD bearish bias strengthens into key data

Rising Wedge Break Warns of Downside Risk

Source: TradingView

Like the message from the NZD/USD weekly chart, the signals from the daily only add to the bearish picture, with a key reversal candle printing on Wednesday after failing at .5800 resistance, contributing to follow-through selling that saw the pair deliver a bearish break of the rising wedge it had been trading in. Having sliced through uptrend support, convention suggests a potential retest of the October low around .5683 may be on the cards, with .5678 and .5640 other known support levels after that.

Mirroring the price action, the momentum picture has shifted far more bearish, with RSI (14) through its uptrend and now sinking further away from neutral territory, pointing to strengthening downside pressure. MACD looks like it may soon confirm, curling over towards the signal line from above while remaining firmly in negative territory. The pair just looks heavy and vulnerable to downside.

The one small area of caution is the price action seen in mid-October, with multiple bearish probes beneath .5715 resulting in reversals. The macro backdrop is not the same, but it should be a consideration for anyone looking at shorts around these levels. The preference would be to sell into rallies towards minor resistance at .5755, should the price return there. That would create a more appealing setup where stops could be placed above to protect against reversal. If the pair were to reverse back above .5755 and close there, the bearish bias would be nixed, putting potential long setups in play seeking a return initially to .5800 resistance.

Kiwi Unemployment Data Looms Large

While the U.S. calendar has some decent risk events this week, as covered in a separate note looking at USD/JPY, the domestic calendar in New Zealand may contain the biggest source of volatility with the release of crucial labour market data for the September quarter. While the Reserve Bank of New Zealand (RBNZ) has a sole inflation mandate, more recently its decision-making process has been heavily influenced the labour market. Unemployment has continued to trend higher even with participation rates falling, keeping the domestic inflation outlook subdued.

Source: TradingView (AEDT)

Should the data released on Wednesday fail to show any meaningful recovery in the labour market, it will increase the probability of the RBNZ adding to the 300 basis points of rate cuts already delivered this cycle. While a 25-basis-point cut at the bank’s final meeting of the year on November 26 is nearly fully priced, with the RBNZ not afraid to deliver large cuts as seen by the 50-point reduction in October, continued signs of weakness may see traders begin to price the cash rate falling beneath 2% this cycle. Only an across-the-board beat in key labour market measures would likely be enough to see markets begin to reduce the probability of further easing this cycle.

Based on the RBNZ’s latest forecasts, it sees unemployment peaking at 5.3% in Q3 with no employment growth and a participation rate of 70.4%. Private sector wages—which typically are influential on domestic inflation pressures—are seen lifting 0.4% for the quarter and 2.1% for the year, the latter in line with the midpoint of the RBNZ’s 1–3% inflation target band. Unless estimated economic slack is not as significant as thought, the latter points to a subdued outlook for overall inflationary pressures.