nzdusd will the kiwi follow aussie potential bearish reversal 1842732017

In today’s Asian session, the AUD/USD plummeted by 60 pips within minutes after the release of Australia’s Q4 2016 inflation data where both CPI and the RBA trimmed mean CPI came in slightly below expectations (1.5% y/y & 1.6% y/y versus 1.6% y/y & 1.7% y/y consensus). In our technical outlook report published yesterday, 24 January 2016, we have highlighted several bearish elements on the AUD/USD and it has now traded below the 0.7545 downside acceleration level as expected (click here for a recap).

Later today at 2145GMT, New Zealand will release its Q4 2016 inflation data follow by a speech from its central banker, RBNZ Governor Wheeler at 2300 GMT.  In the upcoming Q4 2016 inflation, market consensus is expecting for a 1.2% y/y growth, an increase from a lacklustre 0.4% y/y in previous Q3.  In last 3 quarters for 2016, inflation rate has remained subdue at the 0.4% level and if Q4 comes in at 1.2% y/y it will be the first time in more than two years that inflation has returned to RBNZ’s target range of 1-3%. This improved expectation on New Zealand’s Q4 inflation data is derived from rises seen in commodities prices across the spectrum since Q2 2016. However, there are several cautionary factors to consider that the expected pick up in inflation may not be sustainable that will put the hawks in RBNZ on hold as follow:

• Household inflation expectations for the next one year are still in a downward trend since December 2015 that is being capped below 3% where the latest December 2016 figure came in at 2.7% on the average.
• The New Zealand dollar (Kiwi) was the strongest currency among the majors against the USD in 2016 where it gained by almost 8%. Thus, the recent strengthening of overseas inflation especially from China (rising producers’ price) are being negated by a strong Kiwi which may cause overall inflation to remain subdue for some time.
• Heightened trade tensions between U.S. and China due to U.S. President Donald Trump’s protectionist stance where the risk of a trade war can disrupt trade flows in the Asia Pacific region that can lead to deterioration in New Zealand’s economic growth prospects as both the U.S. and China are the top five trading partners of New Zealand.  In addition, New Zealand’s exports account for close to 30% of its GDP. If such scenario happens, the RBNZ is likely to cut its benchmark interest rate again, now at a record low of 1.75%.

Now, let us take a look at the NZD/USD from a technical analysis perspective.

Technical outlook on NZD/USD

(Click to enlarge charts)

Key technical elements

• The on-going up move from 23 December 2016 low of 0.6857 is now right at a descending trendline resistance that has capped previous advances seen in September and November 2016 and staged a bearish reversal in price action thereafter (see 4 hour chart).
• The most recent up move from 20 January 2017 minor swing low of 0.7125 has evolved into a bearish “Ascending Wedge” configuration and this type of chart pattern usually forms at the end of a pronounced uptrend and its subsequent price action (bearish reversal) tends to be volatile. The ‘Ascending Wedge” support now rests at 0.7220 (see 4 hour chart).
• The current up move from 20 January 2017 minor swing low of 0.7125 has traced out a similar fractal configuration before a sharp price reversal to the downside as seen on 09 November 2016 and 14 December 2016 (see 4 hour chart).
• The 4 hour RSI oscillator has traced out a bearish divergence signal at the overbought zone which indicates that the upside momentum of the recent up move has started to abate. This observation has happened in the past two occasions (Nov and Dec 2016) before a downside reversal in price action materialises (see 4 hour chart).

Key levels (1 to 3 weeks)

Intermediate resistance: 0.7280

Pivot (key resistance): 0.7300

Supports: 0.7220, 0.7130 & 0.7050/7017

Next resistance: 0.7380 (see weekly chart)

Conclusion

Technically, the NZD/USD is now at risk of a medium-term (1 to 3 weeks) bearish reversal. As long as the 0.7300 key medium-term pivotal resistance is not surpassed and a break below the 0.7220 “Ascending Wedge” support, the NZD/USD is likely to see a potential down move to target the supports at 0.7130 before 0.7050/7017 next.

On the other hand, a clearance above 0.7300 may invalidate the bearish scenario for a further squeeze up towards the lower limit of the long-term resistance zone at 0.7380.

Charts are from eSignal

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