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Fundamental Analysis

Will The RBNZ Shift To A More Cautious Stance?

Typography

During the late US trading session today, the RBNZ will announce its policy decision and the forecast is for the Bank to remain on hold once again. Economic developments have been relatively downbeat since the latest meeting. The CPI rate for Q2 declined and now lies well below the RBNZ's own forecasts.

Meanwhile the jobs market underperformed during the quarter, with the labor force participation rate dropping significantly. To make matters worse, the Kiwi is trading higher than it was back then.

We believe that these soft data will probably prevent the Bank from turning hawkish anytime soon. In case the RBNZ appears less optimistic on the economy and/or if it revises down its economic forecasts, the latest pullback in NZD could continue. Last but not least, we think there is a probability that the

RBNZ expresses a greater discomfort with the strength of NZD, especially if we take into account the latest soft data. Having said that though, this week's pullback in the currency may have brought the probability of NZD-jawboning down.

NZD/USD continued trading south yesterday, breaking below the support (now turned into resistance) of 0.7330 (R1). In our view, Monday's dip below the crossroads of the 0.7400 (R2) key barrier and the uptrend line taken from the low of the 11th of May has signaled a short-term trend reversal. Therefore, we expect the pair to continue drifting lower and perhaps challenge the 0.7260 (S1) soon, where a clear dip could open the way for our next support of 0.7200 (S2). The catalyst for another leg down, at least towards 0.7260 (S1) could be a more-dovish-than-previously RBNZ tonight. Even if the Bank does not sound as dovish as expected and the pair rebounds, as long as the recovery remains limited below 0.7400 (R2), we would treat it as a corrective move.

Switching to the daily chart, we see that the rate is back within the longer-term sideways range between 0.6880 and 0.7400 (R2). This combined with the negative divergence between our daily oscillators and the price action increases the likelihood for further declines within the aforementioned range.

Trump warns North Korea with 'fire and fury'

Yesterday, a media report suggested that North Korea is developing nuclear weapons capable of striking the US at a much faster rate than expected. This was soon followed by comments from US President Trump, who warned North Korea that it 'will be met with fire and fury like the world has never seen' should it threaten the US. The situation quickly escalated further, with North Korea warning that it could carry out a pre-emptive operation once the US shows signs of provocation. The result was a general risk-off reaction in markets, as safe haven assets such as gold, JPY and CHF rallied, while riskier assets, like stocks, tumbled.

Moving forward, we expect market attention to remain on any headlines regarding this subject. Should tensions between the two nations rise further in the coming days, we would expect to see similar moves across the aforementioned asset classes. In addition, any such moves could be abnormally large, considering the thin-liquidity trading environment in August.

EUR/JPY tumbled yesterday after it hit resistance at 130.70 (R3) to stop fractionally above 128.60 (S1). The price structure on the 4-hour chart suggests a sideways range between these two barriers and therefore we remain flat with regards to the short-term picture for now. Having said that though, if the North Korea situation escalates further in the following days, the pair could break below the lower end of the range and initially aim for the 128.00 (S2) support level. On the other hand, if the dust starts to settle down, we believe that the bulls may drive the rate higher, and perhaps target once again the upper bound of the range, at 130.70 (R3).

Today's economic indicators:

The economic calendar is very light today. From Canada, we get housing starts and building permits for July and June respectively. In the US, the preliminary labor costs index for Q2 will be in focus.

NZD/USD


Support: 0.7260 (S1), 0.7200 (S2), 0.7165 (S3)

Resistance: 0.7330 (R1), 0.7400 (R2), 0.7460 (R3)

EUR/JPY


Support: 128.60 (S1), 128.00 (S2), 127.40 (S3)

Resistance: 129.50 (R1), 130.15 (R2), 130.70 (R3)


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FXGiants
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