It has been a tough few weeks for NZDUSD; combined kiwi weakness and US dollar strength propelled the pair to its lowest level in almost four years. However, as evidenced from the chart below the pair is attempting to mount a comeback. The rally is being helped by encouraging dairy auction results and labour market data from NZ. In fact, the economy appears to be in pretty good shape and it doesn’t look like the RBNZ will be the 17th central bank to loosen monetary policy this year – this was a major weight on the NZD earlier this year.
From a technical standpoint, the aforementioned comeback rally has brought price to a key resistance zone around its 38.2% from where the sell-off began (see chart). With momentum shifting to the upside, a break here could encourage a rally to around 0.7535. Beyond here we are watching 0.7620 – 61.8% retracement level from this year’s high.
China’s soft inflation numbers boost commodity currencies
However, we are concerned about the durability of today’s rally in the aussie and kiwi on the back of China’s softer than expected inflation numbers. The market is banking on this latest set of soft numbers from China to spur the PBOC into loosening policy further. Yet the PBOC only just cut the RRR and it may take a step back for the time being (we are expecting further targeted stimulus this year, but not in the short-term) which isn’t good news for the kiwi in the near-term.
It’s hard to fight US dollar strength
Furthermore, the US dollar seems to being going from strength to strength, and it’s going to be hard for the kiwi to fight this if it continues. The latest dollar rally was sparked by last week’s stellar US jobs report. The combination of continued strong employment growth and encouraging wage growth cannot be ignored by the market and it reaffirmed the Fed’s decision to upgrade its assessment of the US labour market to strong from solid. It is now looking increasingly likely that the Fed will be raising rates sooner rather than later (more and more pundits are calling for a June hike).