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NZD/USD breaks down ahead of RBNZ decision

The past three months have generally seen a sharp rise for the NZD/USD currency pair, driven mostly by a heavily pressured US dollar that has fallen significantly against most of its major counterparts. Since the late-July peak above the key 0.7500 resistance level, however, NZD/USD has experienced a substantial pullback that was exacerbated last Friday when the US dollar finally found some relief on a much better-than-expected US jobs report. The latest culmination of this pullback has been a tentative breakdown on Tuesday below a key uptrend support line extending back to the early May lows.

Looking ahead this week, key events from both the US and New Zealand will play major roles in how NZD/USD moves in the short-term. Inflation data from the US will come in the form of the Producer Price Index on Thursday and Consumer Price Index on Friday. With last week’s US jobs report easily exceeding expectations, markets are now focused on whether prolonged low inflation in the US will continue, potentially contributing to sustained dovishness from the Federal Reserve.

Before the key US inflation data is released, however, the Reserve Bank of New Zealand (RBNZ) will issue its official cash rate decision, policy statement, and press conference on Thursday morning in New Zealand. This decision will be the last one during Governor Graeme Wheeler’s tenure. The cash rate is widely expected to remain steady at the record low 1.75%, but as always, the tone of the central bank’s statement will have a significant impact on the New Zealand dollar. The RBNZ just lowered its cash rate from 2.00% in November of last year. While the central bank is highly unlikely to lower rates again this time, the tone of the statement and press conference is likely to skew from neutral towards dovish, especially amid relatively soft inflation and a stronger New Zealand dollar. With any dovish indications from the RBNZ, the New Zealand dollar could pull back further.

Amid these major economic events from both the US and New Zealand, NZD/USD could make some significant moves this week. Having tentatively broken down below the noted uptrend line extending back to the early May lows, the NZD/USD uptrend is at a critical juncture. With the battered US dollar having already priced-in much of the Fed’s recent dovishness and lackluster US economic data, any impending relief rally for the greenback could help trigger a further pullback for NZD/USD, especially if the RBNZ leans towards the dovish side on Thursday. If this is indeed to be the case, the next major downside target for NZD/USD is at the key 0.7200 support level.

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