- Decline of NZD/USD influenced by New Zealand's economic contraction and strong performance in US growth
- Recent indicators suggest a rebound as dairy prices rise and economic data improves
- Technical analyses indicate a possible reversal for the Kiwi
- The Federal Reserve's interest rate strategy is poised to impact market movements
Overview
The NZD/USD has seen significant downward pressure throughout 2024, primarily due to New Zealand entering a recession and the economic struggles faced by China, compounded by strong growth in the US economy which dampens expectations for imminent Fed rate cuts. However, encouraging recent indicators, such as a rebound in the dairy market—New Zealand's key export—and positive developments in the services sector suggest the Kiwi might be approaching a turning point. Notably, technical indicators, including the emergence of a morning star pattern and a falling wedge formation on daily charts, imply a potential bottoming out for the pair.
The focus now rests on the upcoming Federal Open Market Committee (FOMC) meeting, as the expressed outlook on US interest rates will shape broader market dynamics. A more dovish tone from the Fed could bolster the NZD/USD, whereas a hawkish stance may prompt further declines.
Struggles for the Kiwi are expected
The recent challenges faced by the NZD/USD are no surprise given the backdrop of New Zealand's recessionary environment and sluggish performance by its largest trading partner, China. Meanwhile, the US economy experiences robust growth, characterized by steady inflation and low unemployment, reshaping market expectations around the extent of future rate cuts by the Fed. As a result, the Kiwi, often compared to a 'flightless bird' by traders, remains grounded in 2024.
However, this situation comprises well-known variables. While a continued divergence between New Zealand and the United States may be necessary for further declines, any suggestion of economic improvement in New Zealand could trigger a short squeeze due to the extent of NZD/USD's recent losses.
Hints of economic recovery in New Zealand
Recent upticks in dairy prices offer flickering hope that New Zealand’s economy may be turning a corner. Despite having a strong S&P Global flash services PMI report for the US, it's notable that NZD/USD was one of the top-performing currency pairs during recent trading sessions.
On Monday, NZD/USD completed a three-candle morning star formation, often indicative of market bottoms. The current formation suggests a bounce from support after a previous downside break, bolstering expectations that a near-term bottom could be forming. However, caution is warranted, as momentum indicators like RSI (14) and MACD remain bearish, and traders contemplating long positions should prioritize capital protection.
With the morning star formation in place, one strategy could involve buying at current levels while setting a stop-loss below Friday's low for protection. The reversal observed last Thursday, following an unsuccessful attempt to breach the 0.5800 mark, indicates that this level will need to be surpassed for long setups to be viable from a risk-reward perspective.
Should NZD/USD manage to surpass and maintain a position above 0.6200, it could target the wedge resistance near 0.5850. A break above this level would bring 0.5888 and 0.5929 into focus. Conversely, a drop below Friday’s lows would negate the near-term bullish outlook.
Impact of Fed's rate outlook on trading strategies
This week’s FOMC rate decision is an influential event not only for NZD/USD but also for the broader market landscape. While much speculation surrounds the Fed’s decisions, it’s crucial to concentrate on the committee's indications regarding future interest rate trajectories rather than just the immediate rate cut announcement. A 25bps cut is generally anticipated, so traders should look beyond that.
Current market forecasts suggest two rate cuts by the Fed in 2025, half of what FOMC members projected three months ago. If the Fed signals fewer cuts, the Kiwi may rally; a limited outlook on future cuts could bolster the US dollar. Additionally, the long-run dot projection, which presents the Fed's view on neutral rates, is crucial. Earlier set at 2.9%, any adjustment upwards this time could introduce volatility—especially if it exceeds 3.2%, indicating a prolonged period of elevated rates likely favoring USD strength.
