RBNZ: New Zealand dollar is overvalued
Let us consider the NZDUSD pair. The Reserve Bank of New Zealand cut on Wednesday the Official Cash Rate 0.25% to 3.25% in an effort to weaken the national currency exchange rate. Economic data on May 19 indicated Producer Price Index fell 1.1% in the first quarter relative to previous quarter. Subsequent reports showed the balance of trade in April fell to $123 million from $754 in March and building permits fell 1.7%, while the pace of growth of industrial production in the first quarter over the same quarter in the previous year slowed to 0.6% compared to 2% expansion in the previous quarter. Reserve Bank Governor Graeme Wheeler said in his statement that falling export commodity prices have slowed income and demand growth, resulting in low inflation. The central bank considers the exchange rate overvalued and expects a significant downward adjustment will improve the current account balance and ensure that inflation returns towards the middle of the target range. The US economy on the other hand has recovered from the slowdown in the first quarter as evidenced by strong jobs report and rising retail sales for May. Improving economic performance makes it more likely that the Fed will raise interest rates as policy makers had stated they will make decision based on incoming economic data. Meanwhile, Governor Wheeler’s statement indicated further easing is likely. We believe the divergent monetary policies will contribute to further strengthening of US dollar relative to New Zealand dollar.
NZDUSD has been falling since the end of April after the Reserve Bank kept the official cash rate unchanged at its April 30 meeting but stated it would maintain stimulatory monetary policy. The RSI-Bars oscillator confirms the downtrend. The pair bounced up from five year low on Monday as US dollar retreated broadly against its major rivals on reports that US officials are concerned about US dollar strength. After the unexpected rate cut on Wednesday a bearish engulfing candlestick pattern formed on the chart. The bearish engulfing candlestick pattern usually occurs at the top of an uptrend pattern and consists of two candlesticks, a smaller bullish candle followed by larger bearish candle containing it. The Parabolic indicator has formed a sell signal. The slope of the lower Donchian channel indicates downward movement. We expect the bearish momentum will prevail, and the breach of the lower Donchian channel and the last fractal low at 0.7023 followed by closing below it will signify the resumption of the downtrend. A pending order to sell can be placed below that level, with the stop loss above the last fractal high at 0.71998. After pending order placing, the stop loss is to be moved every day to the next fractal low, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. If the price meets the stop loss level without reaching the order, we recommend cancelling the position: the market sustains internal changes which were not considered.
|Sell stop||below 0.7023|
|Stop loss||above 0.71998|