NZD/USD: RBNZ statement likely to be short and not so sweet

• NZD/USD hits trade target flagged last week
• .6150 looms as level to build further trades around
• RBNZ has no new information on inflation so is unlikely to turn dovish this week
• Jerome Powell appearance, US inflation headline US event risk

Overview

The bullish NZD/USD breakout flagged last week has come to fruition with the trade target of .6150 reached. With the price holding around the level, we look at potential trades ahead of key events including Jerome Powell’s appearance before the US Senate on Tuesday, the RBNZ interest rate decision on Wednesday and key US inflation data on Thursday.

Let the good times roll

You can see how constructive the price action in NZD/USD was last week following Tuesday’s reversal off two-month lows, seeing the Kiwi take out the 50-day moving average before doing away with horizontal resistance at .6105, sending it higher towards .6150.

With RSI and MACD giving bullish signals on momentum, we’re on the lookout for a potential break above .6150, putting NZD/USD on track for a potential test of key resistance at .6218 where it stalled at on four separate occasions earlier this year.

Should NZD/USD push above .6150 and close there, longs could be initiated with a tight stop below the level for protection. The opportunity also exists to flip the trade should a bullish break not occur, allowing for shorts to be established targeting .6105. A stop above .6150 would offer protection.

While there are two setups to consider, longs are favoured given the recent price action and event risk in the coming days.

RBNZ unlikely to turn dovish 

On the NZD side of the equation, the RBNZ is unlikely to turn dovish on Wednesday despite weakness in the New Zealand economy because it will not have access to fresh information on the key sticking point preventing it from cutting rates: inflation data. The next CPI report doesn’t drop until July 17, hinting the July policy statement is likely to be short and not so sweet.

The RBNZ rate decision is sandwiched between the two key US events for the week: Jerome Powell’s appearance before the US Senate Tuesday and the June consumer price inflation report on Thursday.

US event risk skewed towards USD weakness 

As discussed in a separate note over the weekend, following the soft US nonfarm payrolls report on Friday, it’s likely Jerome Powell will continue to provide dovish signals to Senate lawmakers when he appears before them on Tuesday.

Markets are priced for two rate cuts this year with a 75% probability of the first coming in September. It’s doubtful Powell will push back against those expectations. Job market conditions and inflationary pressures are softening and the Fed thinks policy settings are already very restrictive, so the justification for remaining hawkish is diminishing.

While the US consumer price inflation report could delay a dovish shift from the Fed, a strong outcome would be at odds with deteriorating activity and likely limited by ongoing US dollar strength, diminishing the threat posed by tradable inflation.

Given directional FX risks for these events, the US calendar appears skewed towards US dollar softness, adding to similar signals on the charts. Unless the RBNZ goes full-bore dove on Wednesday and signals looming rate cuts, such a backdrop points to upside risks for NZD/USD.

-- Written by David Scutt

Follow David on Twitter @scutty