As the facts change NZDUSD

The well-known quote “When the facts change, I change my mind” attributed to John Maynard Keyes has resonated throughout markets again overnight as the Bank of Canada became the latest central bank to cut official interest rates in response to the economic threat of Covid-19.

The pressure is now on other central banks to follow suit. A situation that may sit uncomfortably with the Reserve Bank of New Zealand (RBNZ) given just 3 weeks ago it politely dismissed the downside risks the corona virus presented and signaled that interest rates were likely to remain on hold at 1.00% for the remainder of 2020.

In contrast to the recent economic data in Australia, the New Zealand economy has been enjoying a run of firm domestic data including GDP, inflation, unemployment, wage growth as well as a significant improvement in business surveys.

Furthermore, the NZ government has promised a big package of fiscal stimulus in 2020 which not coincidentally happens to be an election year. A backdrop that buys the RBNZ time to adopt a wait and see approach if it so wishes.

The interest rate market has taken a less optimistic view. It is currently fully priced for a 25bp cut at the upcoming March meeting and shows a terminal cash rate of 33bps by early 2021, implying an expectation of more rate cuts to follow.

In terms of how this plays out in the NZDUSD, we note there is evidence of a 5 wave decline from the .6755 December 31 high to the recent .6190/80 low. Additionally, the two bullish daily reversal type candles that formed last Friday and this Monday illustrate buyers have been active ahead of the important layer of support .6200/6180 from prior weekly lows and the trendline from the 2000 low at .3901.

Therefore, we would view a break and close above .6320/30 resistance area as initial confirmation that a medium-term low is in place at the recent low . 6190/80 area, keeping in mind that a failure to do so followed by a break and daily close below .6180/60 would be a bearish development with scope back to .5000c.

Source Tradingview. The figures stated areas of the 5th of March 2020. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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