Below is the weekly chart of the NZD/USD. There was a small Double Top chart pattern formed, in late January to March 2019. This Double Top chart pattern’s neckline was broken 4 weeks ago. Price is likely to move lower to the target of 0.6480. On the bigger picture, the decline from 0.7410 does not look complete. It needs another test to the low for confirmation. In this case, we are likely to see a move to 0.6420.
Divergence warnings have been given by MACD and Stochastic when price reached the high of 0.6940. As the market unwinds the selloff, Stochastic is the fastest. It has reached the oversold extreme but MACD is still moving lower and has not shown any sign of a possible turnaround. It means we may not have seen the bottom as yet. MACD is still bearish and is looking more likely to move lower than rise higher. 20EMA is still bearish and is moving lower at the moment, confirming the downward movement.
Today, Reserve Bank of New Zealand announced a rate cut from 1.75% to 1.5% for its official cash rate. The U.S. overnight rate is 2.5%. The cut by RBNZ has increased the interest rate differential between the U.S. dollar and the NZ dollar and this is in the U.S. dollar’s favour. This is likely to lead to more selling of NZ dollar for U.S. dollar, resulting in a lower NZD/USD spot rate.
The reason cited for a rate cut by the RBNZ was the downside risk to the NZ’s economy was larger than the central bank had anticipated. The NZ’s economy is not doing that well and compared to the U.S. economy, which is growing at 3.2%, the NZ dollar is more likely to depreciate against the U.S. dollar. This is another reason for a weaker NZ dollar.
Trump’s threat to increase tariffs on China is also another factor that could weigh on the NZ dollar against the US dollar. Trump’s threat has increased market risk which has resulted in investors moving away from risker assets into safe haven. US Treasury yields have declined, due to more buying of US Treasury. As buying of Treasury pushes up Treasury prices, Treasury yields dropped as a result. US dollar is also a safe haven and will be in demand in a time when market moves into a risk off situation. This is another factor for a weaker NZ dollar against the US dollar.
We believe NZD/USD will decline. We are recommending a sell NZD/USD strategy. We would recommend selling NZD/USD above 0.6600 with a stop at 0.6740. Our target is the previous low of 0.6420.