The New Zealand dollar continued to weaken overnight after a report showed consumer prices fell in the second quarter and concerns grow in China that the government will need to continue to provide more accommodative monetary and credit conditions. Last night, two important statistics were released in China, Chinese 2Q GDP climbed 7.5% and Chinese industrial production in June was up 9.2%, much better than the 9.0% forecast. The key takeaway is that growth has stabilized in China, but the downside risk from the housing market and service sector will hurt growth forecasts for the second half of the year. Any major returns regarding the credit crunch will likely see further easing from the central bank.
The kiwi sold off about 40 pips to the U.S. currency from the New Zealand CPI report and then another 20 pips to .8690 from the Chinese data. The daily chart shows that since forming a bearish butterfly pattern on July 10th, along with a dogi daily candle, the current pullback is gaining momentum as the 5-day losing streak attempts to find support.
Current bearish price action may stabilize around the .8650 region which is the 23.6% Fibonacci retracement of the 2014 low to high move, the 50-day Simple Moving Average (SMA) and key resistance in 2013(a heavily tested trading zone). If downward momentum, breaks beyond this key area, further downside may target the 200-day SMA at .8442.
With the Reserve Bank of New Zealand now appearing to be on hold regarding rate hikes, the current trend is becoming fairly bearish. This is the largest New Zealand currency plummet we’ve seen in 7 weeks, but we may see limited weakness in the kiwi if the downside risk is eased in China for the second half of the year and if New Zealand’s dairy prices finally stabilize after now falling over 30% in 5 months. If bullishness returns, key upside resistance will come from the record high set in August of 2011 at .8841, followed by the psychological .90 handle.
The trade: Sell NZDUSD at .8745 with a stop loss at .8795 and a take profit at .8650. The Risk/Reward Ratio is just under 1:2.
Edward J. Moya
WorldWideMarkets Online Trading