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RBNZ is bullish on the NZD, but US dollar momentum is weighing on the Kiwi

Sentiment towards the Antipodean currencies is mixed currently, as global reflation trades affect the commodity prices and COVID-19 continues to disrupt these economies.

The economy in New Zealand is showing signs of vast improvement though and the Reserve Bank is keen to withdraw supportive monetary policy.

NZDUSD Forex Analysis

Yesterday was a big day for the NZDUSD as the RBNZ and US Federal Reserve Chair were both Tier-1 data points on the economic calendar.

The Kiwi is dominated by the commodity-based economy of New Zealand, plus the larger neighbor of Australia and of course the global reserve currency of the USA. Since April this year, agricultural commodities have declined, and the US dollar has been rising.

New Zealand has done remarkably well with regards to the COVID-19 situation but is still vulnerable to the global pandemic both from infection and supply chain bottlenecks etc.

There was a time when the financial world was convinced the Fed would raise rates sooner rather than later but now concerns have risen over which course Fed tightening will take and how that affects global growth.

The Reserve Bank of New Zealand (RBNZ) has taken point ahead of other central banks and is now moving towards a tightening cycle. They didn’t go as far as to raise bank rates though. Whereas the US Federal Reserve has in their FOMC statement last month hinted at members seeing the first-rate hikes in 18 months or later.

In the testimony to US Congress Fed Chair Powell was slightly more dovish and continued with the narrative of inflation being transitory and ‘substantial further progress’ within the employment and inflation data being ‘still a ways off. The FOMC still predicts progress will continue and this is a good sign for all US dollar crosses, such as NZDUSD.

Inflation is bearish for the host nation's currency, but traders will move to the US dollar short term on interest rate hikes. Fed Chair Powell yesterday said, “If inflation expectations move up in a way that is troubling - materially above and for an extended period - we would respond to that.”

Worries around Chinese GDP growth, the increasing lockdown measures needed in Australia to deal with COVID-19, and general risk-off sentiment has seen today's moves away from the NZD, AUD, and CAD, into the safe-haven currencies of the yen and Swiss franc.

The US dollar is currently in a rising trend channel, but it should be noted that the DXY is in a multi-year downtrend, so this rise in US dollars is a correction rather than a trend. Currently!

Using the ActivTrader sentiment indicator the traders on the platform are mixed towards the direction of the Antipodeans. More traders are bearish the Kiwi and bullish the Aussie, whereas they are usually in line with each other. This may flip to a long bias on the Kiwi and short Aussie when traders digest last week's RBA monetary policy road map of a cautious QE taper starting in September. The RBA is also unlikely to implement a cash rate rise until 2024. In stark contrast, the RBNZ’s said QE will conclude next week and markets price 75bp of rate hikes over the next year.

For me, the NZDUSD is in a downtrend, with momentum pausing while the US dollar consolidates. The tightening of the RBNZ asset purchases will long term be positive for the kiwi but there could be a look below the current range and a test of the lower bounds to the descending channel. This idea gets reversed on a heavy sell-off and resumption of the bear trend in the US dollar index, or if there is a massive uptick in risk-on sentiment and a need for commodities.

The daily stochastic (10,3,3) is showing a positive divergence to price, so if we do get a look below the range and the stochastic doesn’t confirm a lower low, that could be an early indication of a change to the upside.

Channels tend to break in the opposite direction of travel and if we do get above all 3 moving averages and this current consolidation pattern, I will be keen to buy on a retest of the breakout should the RBA and Fed still be lagging the Hawkish cycle of the RBNZ.

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