02.05.201800:27 Forex Analysis & Reviews: NZD/USD: Catch the Corrective Rollback

The New Zealand dollar paired with the US currency is traded at five-month lows. The last time the pair was at current levels was in December last year. Sellers are completely control the situation and, it seems, are ready to storm the 69th figure, developing the downward trend. Bearish sentiment prevails over the pair, however, the decline is too recoilless. Correction has long been overdue, so it is likely that from the bottom of the 70th figure the price will show a pullback, especially if today's release of the price index for dairy products will come in a positive light.

It is necessary to emphasize at once that the downward trend is a priority, and it is only a matter of potential correction. Downward dynamics is caused not only by fundamental and technical factors, but also by positioning in the market. According to recent reports of the COT (Commitment of Traders), published last Friday, large traders (in the Non-Commercial category) reduced the net position for the purchase of the pair by three thousand contracts, that is, up to 24.4 thousand. It is worth noting that large speculators increased their net purchase position during the previous three weeks, but last week began to reduce it. In turn, data on hedgers (Commercial category) indicate that after a five-week increase, market participants began to significantly reduce the net position, aimed at growth of the pair. In other words, the New Zealand dollar fell under a wave of selling, and the bearish sentiment continues to dominate the NZD/USD pair.

The main problem of the New Zealand dollar is the slowdown of key macroeconomic indicators. First of all, inflationary growth significantly decreased. The consumer price index in New Zealand in the first quarter of this year grew by only 1.1% (year on year), while in the same period last year, this increase stood at 1.6%. Price pressure weakened despite a significant increase in excise on cigarettes and other tobacco products (prices jumped 10% at once). Also, the cost of housing (rent and purchase) and utilities increased. But inflation indicators are still showing weakness. According to analysts, such dynamics are due to a seasonal decline in prices for international air transportation and cheaper costs for higher education. These factors largely offset the price pressure, so inflation could not overcome last year's value.

In addition, the dynamics of growth in New Zealand GDP also does not please investors. Since the beginning of last year, this key indicator is gradually declining, falling from 4% to 2.9%. In March, weak data were published for the fourth quarter of last year (0.6% vs. the forecast of 0.8%) - this indicates that the further dynamics of the country's economic growth will be negative. According to economists of the Reserve Bank of New Zealand, GDP in the first half of the year will be "slightly below 3%," thus confirming the weakness of the main indicator.

The situation is not saved even by the labor market: despite the reduction in unemployment and the growth of average hourly wages, the regulator is very cautious and pessimistic. In its reports, the Central Bank makes it clear enough that the current interest rate will remain at the same level for a long time. At a minimum, within the framework of 2018, traders should not expect any action from the RBNZ - according to estimates of a number of experts, the regulator may consider tightening monetary policy not earlier than the middle of next year. And that - only under condition of stable inflationary growth.

In addition to domestic problems, the New Zealand Central Bank looks back at China, which "agrees to peace, but is ready for a trade war" with the United States. However, the New Zealand economy is not so dependent on the China (in comparison with Australia), therefore the Chinese problems influence the course of the NZD/USD pair very indirectly.

Against the backdrop of such a fundamental picture, traders do not see any reason to purchase the New Zealand dollar. The downward trend is in force, and the only thing that is alarming is the lack of corrective movement. Meanwhile, the price of NZD/USD pair is approaching strong enough resistance levels - 0.70 and 0.6980. Against the backdrop of a relatively empty economic calendar, it will be quite difficult for the bears of the pair to pass and (especially) consolidate below these targets.

Also, it should be taken into account that today the index of prices for dairy products will be published: last week this important indicator for the New Zealand showed positive dynamics (+ 2.7%) for the first time in four weeks. If today the index also shows growth, the bulls may temporarily intercept the initiative for a corrective rollback to the local maximum of 0.7090. However, this factor will not cancel the priority of the southern trend: the situation can drastically change only due to the weakness of the US currency.