NZD/USD: Technical Picture is Bearish - Westpac
Imre Speizer, Research Analyst at Westpac, suggests that the NZD/USD has
been stronger than expected so far this year, thanks mainly to the US
“We still expect it to weaken but now target an upgraded 0.65 over the next three months. The main fundamental determinants of NZD/USD over a multimonth horizon are NZ-US interest rates and NZ commodity prices. Add to these the more behavioural “risk sentiment” determinant, and overlay that with broad US dollar behaviour, and we have a framework to forecast the NZD/USD.
Risk sentiment exerts an occasional, but strong, influence on NZD/USD. It appears to have significantly contributed to the 11% rally in NZD/USD since January. Sentiment can be reflected via indicators such as the S&P500, VIX, and MOVE indices. We note they show sentiment is elevated, albeit not at extremes.
NZD/USD will obviously be affected by movement in the broad US dollar, which often moves independently of US interest rates. The fall in the US dollar index was closely matched by a rise in NZD/USD. The DXY index’s sixmonth long decline arguably became stretched, such that May’s rebound has scope to run further during the weeks ahead. That argues for NZD/USD downside.
The technical picture is bearish, at least over a multi-week horizon. First, there is the double top formed at 0.7054 in late April and early May which signalled a reversal. Then there is the downside break on 6 May of a four-month old ascending channel. The channel break targets the 0.6550 area, while a 50% retracement targets 0.6700. Momentum is negative and the recent decline has scope to run much further before an oversold condition materialises.”