In the early hours of Wednesday, 18 August, the NZD/USD will come under focus as the Reserve Bank of New Zealand (RBNZ) prepares to release its interest rate decision and rate statement. After bets were on for the RBNZ to declare a pathway towards tightening, the discovery of the first case of local COVID-19 transmission in months forced the government to implement a snap lockdown for three days.
This action has worsened the sentiment on the NZDUSD. From a 100% chance of a rate hike of 25 bps/20% chance of a 50bos hike, bets for the RBNZ to start a move towards any form of monetary tightening have dropped significantly. It is almost 80/20 now for a 25bps hike or none at all.
The NZD/USD has fallen steeply, losing 1.52% or 120 pips on Tuesday. What is the outlook on the pair?
The markets will be disappointed if the RBNZ does nothing. This scenario would open the door for a drop towards 0.67996 in the first instance. However, this is only possible if the pair can break down the support at 0.69068, which serves as the floor of the rectangle pattern. The completion of the measured move could see the pair drop to as low as 0.67037.
On the flip side, a 25bps rate hike could provide some support for the pair, but we may only see a rise towards 0.69431 or 0.69722 before new offers emerge, especially if new cases among the Auckland case’s contacts start to emerge. The best case scenario would see 0.70009 act as the barrier that eventually brings sellers into the market if there is a rally up to that point. Note that the ascending trendline reinforces the resistance to price action at that level.