Buy 0.6940 for 0.7460 with a stop below 0.6850. Duration of this trade could be 6 months.
Price had reached a low of 0.6467 in March 2019 and has been climbing since that low. Price reached a high of 0.7463 to end the rally and has been in a corrective decline. The corrective decline had found support at the Fibonacci 62% correction point. The ability to stay above the Fibonacci 62% correction point is usually a sign of a possible end of the correction and a reversal is likely to follow. This seems to be the case for this currency pair as well. As long as price stays above 0.6880, it could be heading higher towards its previous high of 0.7463 again in the next 6 months ahead, especially if the Reserve Bank of New Zealand were to hike rate by the end of this year.
Both Stochastic and MACD have been in divergence with price. When price made a lower low at 0.6880, both Stochastic and MACD did not made lower low. This supports the view of a possible price low at the Fibonacci 62% correction point of the advance. Stochastic is close to the oversold zone and is moving higher, hinting of a price rally ahead. MACD, while in the bearish zone is also moving higher and hinting that price will move higher unless MACD starts to turn down again. 20EMA is close to price and is neutral at the moment. This could be view as a possible turning point as well.
The Reserve Bank of New Zealand, in a press conference after its monetary policy meeting in May 26, hinted that the RBNZ was likely to hike its interest rate by September 2022. The central bank also projected interest rate at 1.78% by June 2024. However in its July meeting, RBNZ agreed that economic conditions since late 2020 have been persistently stronger than anticipated. It has since decided to end its monetary support for the economy. This has led to numerous banks adjusting their predication on interest rate trajectory for the Kiwi dollar.
Westpac Bank has forecasted the RBNZ to hike interest rate three times by the end of 2021, with each hike of 25 basis points each. Going by this projection, the Kiwi interest rate would be 1% by the end of 2021. ANZ bank on the other hand is more conservative. ANZ Bank is forecasting New Zealand cash overnight rate to hit 1.75% by September 2022.
At the current level, interest rate in New Zealand is 0.25%, going forward, the gap in interest rate differential between the U.S. and New Zealand is expected to widen by September 2022. The Federal Reserve has yet to announce when it will taper its monetary policy and is unlikely to announce a tapering in its FOMC meeting this week. The Fed, on the other hand has maintained it will keep its monetary policy accommodative as the US economy has not met the Fed’s conditions for a tightening.
We are expecting this widening interest rate differential between the US and New Zealand to lead to a stronger New Zealand over the next 6-9 months.