July 13, 2021 14:07:13

NZD/USD has a lot to contend with right now. A much stronger than expected US inflation report is challenging the Fed’s view that rising price pressures are temporary. The headline number was the highest in 13 years while the core reading of 4.5% y/y spiked to 30-year highs. Rate hike expectations priced by the market have risen with a 90% chance of a hike in December 2022. The dollar is bid with the DXY challenging 10-week highs.

We also have the RBNZ meeting to focus the minds, who convene overnight. A nod to policy normalisation is expected with new forward guidance and possibly more tapering of QE. Markets are already pricing in a 25bp rate hike in the next six months, so the bar is pretty high to more bullish signals – too high perhaps? Some commentators expect the bank to wait to until its August meeting to check on more data before moving policy.

NZD/USD hit seven-month lows straight after the US CPI data but has pulled back since the release. This isn’t that surprising seeing as there is a support zone around the March, April and June lows. The bearish candle that printed on 6 July warned of a move lower and the pair has tested this zone on a few occasions. This pin bar signal has a long upper tail showing a rejection of higher prices with the implication that prices will fall in the near-term.

With the RBNZ coming soon there is certainly a catalyst for an extended rebound off this major support area, but the pair will need to get above 0.71 to slow the downtrend from the June highs. Otherwise, the bears will try to retest the support zone if the bank steers away from too much hawkishness. A breakthrough will also have to battle with longer-term highs from early 2019 around 0.6969/0.6924. So, a big support zone is waiting for a big risk event.