NZD/USD: Any rally is likely to be limited

According to the Currency Research Team at BNZ, the NZD/USD pair had a better run over the past couple of weeks but they are hesitant to declare with confidence that the downward trend is over.

Key Quotes:

“While within the mix there’s certainly a hint of better fundamental support for the NZD, speculative behaviour regarding positioning has also been in play. Much of the outperformance of the NZD last week seemed like a perverse performance in light of a significant correction in global equity markets and our risk appetite index – made up of the VIX index, emerging market credit and US high yield credit spreads – plunging from 64% to 51% (and reaching a fresh year-to-date low of 45% last Thursday).”

“To the extent that technical factors might be in play behind recent NZD support, it might be too early to declare that the downtrend in the NZD is over. Trendline resistance sits around 0.6630 but we’d want to see a break of previous resistance at 0.6730 to be more confident that the downtrend has been broken.”

“The mild recovery in the NZD has been driven by a combination of technical and fundamental forces. And last week’s price action highlighted how much negative news has already been priced into the NZD. Our revised FX forecasts of a couple of weeks ago had the NZD ending the current and next quarter at USD0.65, so that would be consistent with a period of consolidation ahead, or some arresting of the 6-month downturn. We aren’t overly confident that fresh lows won’t be made over coming months and have some conviction that any rally is likely to be limited.”

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