Break below 0.8500 significant for Kiwi

Break below 0.8500 significant for Kiwi

By Garry Dean (Sales Trader, CMC Markets New Zealand)

Last week’s break below the key 0.8500 – 0.8515 support window was significant for the Kiwi, and this level is now expected to provide major topside resistance going forward. Monthly charts show a bearish key reversal in May, and we open below the 100-day moving average to start the week. While short-term support is seen at 0.8437 and 0.8405, the break below 0.8500 suggests downward momentum is building, and short-term strength is likely to encounter further selling back towards this level.

Last week’s massive slump in NZ business confidence followed on from a 4.4% slide in consumer confidence, and provided the impetus for the decline in the Kiwi. The Fonterra pay-out revision to $8.40 this season was largely expected, with the $7.00 starting point for next season reflecting the 23% fall we have seen in the past seven GlobalDairyTrade auctions. This is forecast to reduce farmer incomes by around $2.6 bio, and take around 1% off our annual GDP. No doubt this will be a major consideration for the RBNZ in the lead-up to the 12 June Monetary Policy Statement, with their economic projections and inflation forecasts both likely to be revised lower.

The NZD/AUD cross fell over 1% last week as the AUD surged on a sharp increase in business investment spending estimates for next year. The cross fell to a low of 0.9105, and revisited its 200-day moving average for the first time since mid-March last year. The RBA meet today, and with a tight fiscal budget, a slump in consumer confidence and a sharp decline in building approvals recently, they are likely to adopt a more dovish stance. The RBNZ however are still expected to hike rates a further 25pts in June, albeit with a likely reduction in the trail of rates going forward, and this widening interest differential should help support the cross. Indeed in an environment where central banks of developed nations remain focussed on keeping rates close to zero (the ECB are expected to cut again on Thursday night), the reaction to a further rate hike on 12 June by the RBNZ from foreign investors in search of yield will be a key theme in the second half of this month.

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