NZD/USD Strong Downside Bias After Testing 0.7000

The Reserve Bank of New Zealand surprised markets on Thursday by cutting its official cash rate by 0.25% to 3.25%. This was the first cut in four years and expectations of further cuts were raised after the RBNZ said in its statement that further easing may be appropriate. Weak commodity and dairy prices were cited as the main reasons for slowing demand growth, and with inflation low and the exchange rate still overvalued, there is room for further cuts. The kiwi tumbled against both the dollar and the aussie after the cut. It dropped from a high of 0.7210 against the US dollar before the announcement to 0.7015 in the Asian session. The aussie jumped from 1.0747 to 1.1060 against the kiwi after the cut.

There were more rate reductions in Asia as South Korea’s central bank lowered its base rate by 25% to 1.50% as a pre-emptive move to support the economy as the country battles the spread of MERS virus. In contrast, expectations of further rate cuts in Australia were lowered after unemployment came in below forecasts at 6.0% in May, against estimates of 6.2%.

There was mixed data from China as industrial production grew by 6.1% year-on-year in May, against forecasts of 6.0%. Retail sales came in within estimates at 10.1% but fixed asset investment disappointed as it was up by 11.4% annually in May, against expectations that it would grow by 12.0%, making it the slowest growth in 15 years.

In Europe, late night talks between the leaders of Greece, France and Germany failed to produce an outcome but there was agreement to intensify talks. There are reports that the Greek side has made concessions on key areas such as VAT and pension reforms. Further talks are expected on Thursday between the Greek prime minister and the EU Commission president.

The euro was steady in Asian trade and was last trading at 1.1291 against the dollar, as rising German bund yields, which moved above 1% on Wednesday, provided some support. Against the pound, the euro made small gains, rising to 0.7304 in late Asian trade. The pound was boosted on Wednesday by stronger-than-expected industrial production data but moved lower today against the dollar as it slipped to 1.5445. The annual speech by Bank of England Governor Mark Carney at Mansion House had no impact on sterling as the speech was focused on tightening regulation for misconducts within the banking and financial sector. The yen sharp rally against the dollar following Kuroda’s comments that the yen is “very weak” did not hold as the dollar advanced back above the 123 level today and was last trading at 123.35.

Technical Analysis NZD/USD

The intra-day bias on the NZD/USD remains on the downside after the large drop early on Thursday to a near 5-year low of 0.6996. The decline from the peak of 0.7743 (April 29 high) has resumed after a brief upside move to 0.7231 on Wednesday.

After a break below support of 0.7175 (February 3 low), this level became a strong resistance level which prices tested several times since the beginning of June.
The outlook is bearish since the market remains below the Ichimoku cloud. The tenkan-sen and kijun-sen lines are falling, which support a bearish bias. Also RSI is in bearish territory below 50. It is not at oversold levels yet so there is room for further downside momentum.

The next targets lie at 0.6792 and 0.6559, which are the July and May 2010 lows respectively.