The fundamental outlook for NZD/USD

NZD/USD has survived a prolonged period of declines since the second half of July. In September, a bullish correction has finally started. Will this recovery last? We try to answer this question by studying the fundamentals for the NZD and the USD.

The NZD side of things

New Zealand has strong trade ties to China, so the main reason for the depression of the NZD was the escalation of the US-Sino trade tensions this summer. The relationship between the two nations has warmed up a little in the recent days giving the market the desired reprieve. Investors now await a new round of talks between the United States and China in October. Although the fundamental breakthrough in the trade war is unlikely, market players are hoping that the parties will at least manage to avoid any further measures aimed at hurting each other’s exports. All in all, these hopes can give the riskier assets, the NZD included, the room for the upside. According to TD Securities, the kiwi has become undervalued and should trade around 0.66 versus the USD.

Still, the high uncertainty and volatility have to be taken into account while deciding on the sizes of stop losses and other risk management parameters of a trade: we know perfectly well that things may emerge from Donald Trump’s Twitter or other sources that can aggravate the situation once again.

The Reserve Bank of New Zealand (RBNZ) will meet on Sep. 25. The central bank made an excessive 50-bps rate cut in August which surpassed market expectations. After such a move, the odds are that the central bank will keep policy unchanged for a while to watch how the economy is doing. By the way, on Sep. 19, New Zealand will release the quarterly GDP growth numbers - these figures will matter. The lack of immediate further easing can provide the NZD with some support, especially if it’s in contrast with what the Fed does.

What about the USD?

The Federal Reserve is expected to cut federal funds rate on Sep. 18. The move is already largely priced in by the market. Traders will wait for comments and forecasts of the American regulator: they indicate the Fed’s determination to continue easing policy, the USD will suffer and NZD/USD will push higher. If the Fed seems unsure about the future rate cuts, NZD/USD won’t have such an engine to the upside and the advance will be more difficult.

NZD/USD formed a bullish engulfing pattern on the W1

Conclusion

All in all, factors both from New Zealand and the United States allow us to expect the continuation of the recovery in NZD/USD. Resistance levels lie at 0.6470 and 0.6530. Notice that the fundamental picture may change, so it’s very important to monitor the incoming news and market sentiment. Notice that despite the fact that we see positive opportunities for the NZD, the big change in the overall negative trend for the currency is unlikely as long as the clash between the United States and China keeps hurting New Zealand’s producers and tourism is affected by China’s growth slowdown and Brexit.

nzd usd

Elizabeth Belugina

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