NZD/USD is close to a bottom; modest recovery is coming

• RBNZ expects a contraction in Q3 and Q4, while Treasury sees growth continuing into Q3 (avoiding a recession)
• Monthly resistance hovers at 0.6015, September 1st high, while support resides at 0.5741, November 3rd low
• New Zealand overnight swap index price in a peak rate of 5.598% by the February 28th meeting

The New Zealand dollar’s bearish trend that has firmly been in place since the middle of the summer appears to be running out of steam. All the China growth concerns and policy-driven recession might be fully priced in.  Price action on the daily chart shows bearish momentum accelerated after the break of key trendline support and the daily close below the 50-day SMA.  Initial support has emerged from the 0.5850 level, but for that to hold investors will need to become more optimistic with the Chinese growth outlook.

Despite an interest rate differential that will remain clearly in the dollar’s favor, the pair appears poised to consolidate between 0.5850 and 0.6000.  A break below that range will see sellers establish a more bearish bias, potentially eyeing the 0.5740 region. It is around that area that a bullish Gartley pattern could form.  Point D is targeted by both the 78.6% Fibonacci retracement of the X to A leg and the 161.8% Fibonacci expansion level of the B to C leg.

If the global growth outlook stabilizes here, the kiwi could attempt to recapture the 0.6015 level.  The New Zealand economy could have a modest recovery in the fourth quarter, anticipating improving Chinese economic data, a peak in the US dollar put in place, and as commodity currencies outperform in the winter.

Upcoming Data

Friday’s August BusinessNZ Manufacturing PMI reading is expected to remain in contraction territory for a sixth straight month.  Business conditions will start to show signs of improving, but manufacturers will likely remain cautious.  China’s activity data should provide some evidence the economy is stabilizing.  Industrial production and retail sales should show modest improvements.

dollar
commodity
policy
us dollar