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Following the
RBNZ cutting its Official Cash Rate (OCR) by 50 basis points
(bps) in November 2024, economists and investors expect
another bumper 50 bp rate reduction on Wednesday this week – with an outside
chance of a more minor 25 bp reduction. A 50 bp (25 bp) adjustment would bring
the OCR to 3.75% (4.00%). In addition, markets are also expecting
another 75 bps worth of cuts this year.
Sluggish Economic Activity
I’ve observed little reason to stray from market pricing and expect an
additional 50 bp cut this week. Gross Domestic Product (GDP) growth fell into a
technical recession in Q3 24 after printing a second consecutive quarter in
negative territory; the -1.5% contraction was the lowest figure since Q2 20.
Additionally, unemployment has risen to its highest level since late 2020 at
5.1% (Q4 24), and given inflation remains within the RBNZ’s 1-3% target band –
Q4 24 inflation increased to 2.2% (matching the 2.2% print in Q3 24) – the
central bank has ‘room’ to lower the OCR.
With a 50 bp cut largely baked in, and assuming the central bank follows
through, I expect a knee-jerk sell-off across New Zealand dollar (NZD) pairs. That
said, most focus will be on any change in the rate statement’s language, press
conference commentary, and any revisions in the updated economic projections.
NZD/USD Vulnerable to the Downside
Price action on the monthly timeframe for the NZD/USD (New Zealand
dollar versus the US dollar) came within a stone’s throw of testing long-term
support from US$0.5511 this month. Anyone following candlestick patterns may
note that the current monthly candle is poised to close by way of a bullish
engulfing formation. While monthly support is clear, and the bullish engulfing
pattern indicates buyers may want to explore higher terrain, the rebound in
October 2022 failing to print a meaningful high may concern long-term bulls.
Couple this with the overall long-term trend facing south, and any higher
rebound could be short-lived.
This brings me to the daily timeframe’s structure. Friday wrapped up
pencilling in a dominant higher high (US$0.5738), reaching levels not seen
since December 2024. What I also find interesting is although we have a higher
high, this move represents a possible D-leg to an equal AB=CD resistance
between a 200% extension ratio of US$0.5804 and horizontal resistance at
US$0.5774, along with a 100% projection ratio (the equal AB=CD structure) at
US$0.5789 nestled within the zone.
Consequently, although monthly price is testing a support area, my base
case is that the path of least resistance remains to the downside for the
NZD/USD. Daily resistance between US$0.5804 and US$0.5774, therefore, will be
on my watchlist this week.
Chart created using TradingView
Written
by FP Markets Market Analyst Aaron Hill
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