On Thursday the Reserve Bank of New Zealand (RBNZ) decided to increase its interest rate by 25 basis points from 3.25% to 3.5%. This is a move that would usually signal New Zealand Dollar strength. But this time around the exact opposite occurred: the interest rate hike caused its currency to fall hard across the board and against all of the other majors.
The central question is: why and what happened?
WHY THE KIWI FELL (AND DID NOT RISE)
The Reserve Bank of New Zealand (RBNZ) has labeled the current level of the kiwi dollar as “unjustified” and “unsustainable”. This has given rise to expectations that the RBNZ could intervene in the markets to weaken the currency.
The NZDUSD has fallen from its high of 0.8835 on July 10 down to below 0.8590 as of the 24th of July. The NZDUSD had approached a multi decade high of 0.8840 which was set 3 years ago, but has failed to break through the magical level. With a fall of more than 2.5 cents, the Kiwi in fact seems to be picking up momentum to the other side.
US DOLLAR STRENGTH
Whereas New Zealand could face intervention from the RBNZ, the other side of the currency pair must also be considered: the U.S. Dollar. The USD could be another reason why the NZDUSD is come under increasing bearish strain. Is a trend in the US Dollar possible as markets prepare for interest rate discussion and potential hike?
YES. With geopolitical tensions on the rise and the US economy offering signals of some recovery, the US Dollar could become the currency in demand for the 2nd half of 2014 and (the beginning of) 2015.
Using technical analysis we can estimate at what point a US Dollar trend has started.
EURUSD: with the break of the 1.35 support recently this pair has started a down trend. The weekly chart is posting lower lows and low highs after a break of the rising wedge (orange lines) at the 61.8% Fibonacci retracement. Although weekly horizontal level (green) still stand in the way of a full fledge downtrend, the downside momentum is picking-up especially if price manages to break below 1.3450.
Price has broken out of its uptrend and is back below the monthly broken resistance and top of 1.7040. These are signals that a reversal could occur from these highs. A break below 1.6950 and later on below 1.67 is in fact needed for a downtrend to be in force.
What are YOUR expectations of the US Dollar for the rest of the year??
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