NZD/USD: Testing 0.801 Resistance

Kiwi dollar has seen incredible rally last week, the largest gainer against USD W/W. Not only that, NZD was also the strongest currency against all majors, gaining 2.77% against an equally weighted basket of major currencies. However there wasn’t any clear fundamental reason for NZD to strengthen to such an incredible extend; there wasn’t any major news release from New Zealand. USD weakness certainly play a huge part, but doesn’t explain why Kiwi managed to trump CHF, EUR and JPY so comprehensively.

The next logical explanation would be the correlation with counterpart AUD. Aussie dollar has rallied significantly following a slightly less dovish than expected monetary policy statement followed by a stronger than expected GDP print. It is possible that the less dovish statements from RBA rubbed off NZD as well, with speculators betting that RBNZ will have even lesser odds of introducing rate cuts this week. However this explanation may not sound convincing if we consider that AUD was weaker than that of NZD during the same period of time. Hence, we are forced to accept that there is a huge element of speculative behavior and perhaps a pinch of irrationality in Kiwi dollar’s strong rally.

Hourly Chart
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From a technical perspective, we can see prices hitting the resistance 0.801 currently. Prices dipped lower during early Asian session but recovered quickly without tagging the rising trendline beneath. This suggest that current bullish momentum is still strong even though Stochastic readings are entering Overbought region. This implies that even NZD/USD may still be able to break the 0.801 and aim for higher levels – possibly 0.81 round figure which has been the show stopper for bulls in the past 2 months.

With RBNZ rate decision coming on Thursday, traders may have the best shot to break the 0.81 resistance especially if prices are close to the figure just before the announcement. It is unlikely that RBNZ will be able to announce any rate cut this time round especially with latest QV House Prices growing at 8.5% Y/Y. Furthermore, RBNZ has mentioned that they would not be changing rates for the rest of the year, and will certainly risk credibility if they actually go back on their word. Hence upside risk for NZD/USD for the event is high, and assuming that bullish momentum is still ongoing then, a break of 0.81 is not unreasonable. That being said, if price still fails to break 0.81, then it is possible that the bearish pullback may be equally if not more aggressive.

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