Following the Reserve Bank of New Zealand (RBNZ) decision on Wednesday, New Zealand dollar (or so-called kiwi) dropped markedly by nearly 200 pips and further decrease is still expected as a question of further benchmark rate lowering arose. Moreover, US dollar’s strengthening from a long-term perspective remains a part of the outlook as well.
The RBNZ decided to cut the Official Cash Rate (OCR) on Wednesday by 25bp, a step seen for the first time since march 2011, to actual 3.25%. Moreover, the central bank hinted further rate-cuts, adding fire to the kiwi downfall. Overvaluation remains in focus of the central monetary authority.
The major reason for such steps of the RBNZ was the disappointment from the economy growth, reflected by a cut of GDP outlook to 3.3% from previous 3.8%, what is an unexpectedly sharp change. Inflation forecast has been only slightly improved as the RBNZ expects the target to be reached in Q4 2016 from preceding expectations of Q3 2017.
Traders reacted immediately by massive sell-off of the kiwi as further similar RBNZ’s rate-cuts are widely expected by the market if no improvement of the GDP is in sight. We expect the kiwi to extend its gains even further, with possibility of slight correction after the first bearish impact of RBNZ’s decision.
As for the US dollar as its major peer, we have already expressed our long-term expectations of bullish trend on the greenback, based on the Federal Reserve’s tightening plans for its monetary policy. Although the central bank remains patient with such step, understanding fully the strong impact of such adjustment, it is still expected to make this decision ahead of the European Central Bank, Bank of England, Bank of Japan or the Reserve Bank of Australia. Thus it only adds to already bearish expectations for the NZD/USD currency pair.
From the technical point of view, we can see the next support level at $0.6957, or later at $0.6849. In case of bullish correction, traders should think about the resistance levels of $0.7141 or $0.7195 as their take profit levels.
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