The NZD/USD pair is falling rapidly: on July 14th, traders reached a multi-month high by reaching the 0.6406 mark, and on Friday, the price settled around the 0.61 level. In other words, the pair has fallen more than 200 pips in just a week, after a swift 300-pip rally. Sellers are confidently regaining lost ground as the kiwi gets weaker while the greenback is getting stronger.
Take note that the NZD/USD pair actively grew in the first half of July, thanks to two inflation reports published in the US and New Zealand. To be precise, we witnessed the US dollar's broad weakness due to three inflation reports that indicated a developing trend. The consumer price index, producer price index, and import price index – all three gauges landed in the "red," raising doubts about more rate hikes from the Federal Reserve after the July meeting.
A similar situation unfolded with the New Zealand dollar: the latest inflation report led NZD/USD sellers to assume that the Reserve Bank of New Zealand's declared pause is the actual end of the current rate hike cycle. As a result, the fundamental background for the pair changed dramatically, and short positions became preferable.
Speaking about the possible actions of the RBNZ in the second half of this year, many currency strategists (including UOB Group) warn their clients that based on previous tightening cycles, the New Zealand central bank usually takes a pause before raising the Official Cash Rate (OCR) again. However, the majority of analysts' baseline forecast suggests keeping rates unchanged not only at the upcoming (August) meeting but also in subsequent meetings - at least for the current year.
Commenting on the latest inflation report, almost all experts agree that it will not act as a "trigger" for the central bank, as it reflects a slowdown in inflation, despite the fact that the pace of decline in key indicators leaves something to be desired.
According to the latest data, the New Zealand Consumer Price Index rose 6.0% over the past year (prev: +6.7% in the first quarter). This is the slowest pace of growth in the indicator since the fourth quarter of 2021. On a quarterly basis, the index also reflected a downtrend. However, instead of the expected decrease to 0.9%, the indicator stood at 1.1%. But this is still the weakest pace of growth since the first quarter of 2021. Domestic inflation (aka. non-tradables inflation, this component is one of the most important indicators of internal price pressure) also decreased to 6.6% from the previous value of 6.8%.
This report was published on July 19th, while the RBNZ released the inflation report under the sectoral factor model. The kiwi did not benefit from this report, which means that it was on the side of sellers of NZD/USD. According to the central bank's calculations, inflation in the second quarter of the current year reached 5.8% on a yearly basis, which matches the first quarter's level when the indicator also hit the target of 5.8%.
This gauge, like the Consumer Price Index, is closely monitored by the central bank so the downtrend is well justified. There's a high probability that the RBNZ will maintain a "wait-and-see" approach not only in the next month but also throughout the year (and possibly in the early months of 2024), afterwards it may start lowering the interest rates.
Take note that the downtrend is also driven by the strengthening of the greenback: the US Dollar Index is actively approaching the 101 level amid increased risk aversion sentiment. Washington and Beijing exchanged extremely unfavorable statements, raising the probability of a tech war between the two countries, which led to the US dollar being in higher demand as a safe-haven asset.
Overall, the current fundamental background favors the continuation of the downtrend, making short positions reasonable for the NZD/USD pair, but with certain reservations mentioned below.
From a technical perspective, on the 1D chart, the NZD/USD pair is within the Kumo cloud and on the middle line of the Bollinger Bands indicator. Despite the bearish attack, the price failed to break the resistance level at 0.6150, which corresponds to the lower line of the aforementioned Kumo cloud. Failure to stay below this target indicates that it is risky to sell at the moment. Short positions will be prioritized once sellers break the lower band of the Kumo cloud and settle below the 0.6150 level. In that case, the Ichimoku indicator will form a bearish "Parade of Lines" signal, and the price will stay in between the middle and lower lines of the Bollinger Bands on the 1D chart. The primary target for the bearish movement is the 0.6030 level (the lower line of the Bollinger Bands on the same timeframe).