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NZD/USD: What's Next For The Kiwi?

NZD/USD: What's Next For The Kiwi?

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NZD/USD hit a new two-year low last week despite some encouraging signs that New Zealand’s economy is starting to improve.

New Zealand’s economy expanded by 1.7% in the second quarter, compared to a 0.2% contraction in the three months prior. Furthermore, GDP grew 0.40% on an annualized basis. Although down on the previous 1.2% print, was still above analysts’ forecasts.

The GDP beat follows the Reserve Bank of New Zealand’s (RBNZ) rate hike last month, the seventh-consecutive increase. The central bank has delivered four back-to-back 50 bp raises, lifting the Official Cash rate (OCR) to 3.00%.

The slight improvement in economic growth and New Zealand’s low unemployment rate of 3.3% has thus far failed to lift the Kiwi against the greenback. As it stands, the NZ dollar has depreciated by almost 12% against its US counterpart this year. Furthermore, this week, the Federal reserve is expected to deliver the latest in a long line of super-sized rate hikes.

On September 21, the Federal Open Market Committee (FOMC) is forecast to lift interest rates by 75 basis points to 3.25%. If the Fed deliver 75 bp’s as expected, it will mark the third-consecutive hike of that magnitude. Moreover, some analysts forecast the Fed may even surprise with a 100 bp hike. In that event, NZD/USD could weaken considerably. However, the rate has reached a significant long-term support level that may limit the downside — that is of course, unless the Fed take the nuclear option.

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US Dollar to NZ Dollar Forecast

The weekly price chart shows that NZD/USD is approaching the support of the may 2020 low at $0.5930. Notably, the level proved a springboard two years back, eventually sending the Kiwi to three-year high of $0.7464 against the dollar. Whilst, we don’t expect to see similar price action now, the support could alleviate some of the immediate pressure on NZD/USD. However, to register more gains, the Fed must deliver a dovish surprise, which in our view is unlikely.

For that reason, NZD/USD is likely to soon breach the support. In that event, the market looks to the March 2020 lows around $0.5470 as a potential longer-term target. The bearish view is valid as long as NZD/USD is below the horizontal resistance around $0.6200. A weekly close above this marker, improves the technical outlook to bullish.

NZD/USD Price Chart

NZD/USD Kiwi Dollar
Elliot Laybourne
Elliott is a former investment banker with a 20 year career in the city of London. During this time he held senior roles at ABN Amro, Societe Generale, Marex Financial and Natixis bank, specialising in commodity derivatives and options market-making. During this time, Elliott’s client list included Goldman Sachs, JP Morgan, Credit Suisse, Schroders Asset Management, and the Pennsylvania State Public School Employees Retirement System, amongst others. Today, he splits his time between Thailand and Dubai, from where he provides trading consultancy and business development services for family office and brokerage clientele.