The Reserve Bank of New Zealand is expected to release its economic outlook on early Thursday. The schedule was announced a week ago which set off strong declines in the New Zealand dollar as investors sold off the NZD expecting the central bank to take a dovish stance and potentially pave way for rate cuts. The bearish view on the Kiwi also gained following Monday’s quarterly inflation data. New Zealand CPI increased 0.40% on the year in the second quarter of 2016. It was lower than forecasts of 0.50% increase and rose at the same pace as the previous quarter.
On Tuesday, the RBNZ said that it proposed changes to the loan-to-value restrictions to contain the overheating of the property markets in New Zealand. The RBNZ had released a consultation paper in this aspect proposing that investors looking to buy property should deposit at least 40% of the value when applying for a home loan.
RBNZ Governor Graeme Wheeler said, “The banking system is heavily exposed to the property market and investor lending has been increasing rapidly. The proposed restrictions recognize the higher risks associated with such lending.”
In this context, the RBNZ’s economic outlook report due tomorrow could be seen as an important catalyst in the near term outlook for the NZDUSD. Kim Martin, strategist at BNZ says, “We anticipate the RBNZ will make very clear that if this level sustains it will provide a serious impediment to achieving its medium-term inflation target” in reference to the trade weighted index of the New Zealand dollar, which is 6% higher than the RBNZ’s projection for this quarter.
The RBNZ’s next policy meeting is due on August 11, 2016.
NZDUSD – Watch for a potential head and shoulders pattern
From a technical outlook, following the rally to 0.73 in early July, the NZDUSD has been steadily falling. Price is expected to touch down to 0.70 handle, which is seen as a strong support level, having been tested around mid-June and then again on early July.
The current price action also points to an early indication of a possible head and shoulders pattern that is taking shape. This is however subject to price action holding off the 0.70 support level and followed through by a retracement back to 0.72 – 0.725 regions and a subsequent break down of prices near the established neckline support of 0.70. The measured move of the head and shoulders pattern indicates an eventual decline to 0.67 over the next few weeks.
Supporting this view of the potential head and shoulders pattern is the median line and the price evolution. Forming a lower high following the breakdown of the median line on July 15 would potentially confirm a correction lower. 0.67 remains an important support level which was tested briefly on May 30 before the onset of the strong rally that sent NZDUSD to 0.73 highs.
The key risk to the current outlook for NZDUSD is a possible breakdown of the current support near 0.70. A strong decline off this support will invalidate the potential head and shoulders pattern and the outlook will have to be revisited. Likewise, an overshoot above 0.73 will see the right shoulder rising above the head where the previous top was established at 0.73.
