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The New Zealand Dollar Is Too Expensive For The RBNZ

The New Zealand dollar fell sharply yesterday, losing 0.52% against the US dollar and was the weakest currency of the day after the RBNZ’s monetary policy meeting and press conference.

The Reserve Bank of New Zealand held the overnight cash rate steady at 1.75%, as widely forecast by economists polled. The RBNZ governor, Graeme Wheeler said that interest rates were likely to remain low but acknowledged the recent uptick in inflation. New Zealand’s quarterly inflation expectations had increased 1.9%, up from 1.7% while the quarterly CPI rose 0.4%, pushing the annual inflation rate to 1.3%.

Mr. Wheeler said that the central bank estimates the overnight cash rate to be around 2% by 2020, up 25 basis points in three years time, which longer than estimates by economists who expect the RBNZ to start hiking rates as early as 2018. The RBNZ has shifted from an easing bias last November to a neutral stance at yesterday’s meeting.

The RBNZ governor highlighted the risks of heightened outlook on the global economy which could be a drag on the economy. The RBNZ governor said that as a result the monetary policy would remain accommodative for a considerable period of time and that policy will adjust according to the risks and change the global outlook.

Mr. Wheeler also had some views on the US as he warned of potential inflation shocks to the world’s largest economy which could also trigger higher interest rates should the president follow through on this protectionist policies. Mr. Wheeler was referring to the proposed import tariffs that could spark an inflation rise would force the Fed into tightening monetary policy faster than expected.

Speaking of the exchange rate, the RBNZ’s statement said that while financial conditions in the economy have firmed on the back of long term interest rates rising and the continued increase in the currency’s exchange rate. The statement cautioned against this trend noting that a higher exchange rate would not be able to sustain balanced growth. Combining this with the low global inflation the exchange rate is expected to generate negative inflation in the tradables sector. Thus, the central said that “a decline in the exchange rate is needed.”

NZDUSD Technical Outlook

The New Zealand dollar is on track to post the first weekly loss after six consecutive weeks of back to back gains. There is a strong chance of a deeper correction down to 0.7040 in the coming two – three week’s time following the failure to breakout above 0.7300 last week, which has proven to be a strong resistance level that previously pinned prices triggering a downside correction.

On the 4-hour chart, the breakdown below 0.7243 was the cue as the price level marked the support of a broadening descending triangle pattern. With the breakdown of the support at 0.7243, price action also broke past the rising median line. This will trigger the downside bias towards the support level at 0.7040 that could be tested in the near term.

However, the Kiwi could be posting a surprise bounce from the current level and thus could be seen retracing the declines towards the potential resistance level of 0.7217 – 0.7243, which offers better selling opportunities as compared to the current market prices. This view is also validated by the Stochastics which remains very oversold on the 4-hour time frame.

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Thursday, 09 Feb, 2017 / 8:06

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