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NZD trades lower as Labour takes government

New Zealand dollar | Econ Alerts

Daily Analysis | 19 October 2017


The Kiwi dollar traded lower during the early European morning Thursday, following the announcement that New Zealand’s next government will be a Labour-New Zealand First coalition. The outcome hinged upon who NZ First would support, as neither of the two big parties (Nationals, Labor) gained a majority in September’s election.

In our view, the negative reaction in NZD is a reflection of market concerns around New Zealand’s future trade relations with its partners. Specifically, NZ First is a party that advocates protectionist policies and seeks to renegotiate free trade deals such as the Trans-Pacific Partnership (TPP), something that the Labor party has said it is open to in the past. Thus, this coalition may have raised the likelihood for protectionist policies in New Zealand, which could weigh on the nation’s trade-heavy economy. With no RBNZ policy gatherings or major pieces of economic data on the calendar for a while, we think that this negative sentiment could continue to weigh on the Kiwi over the next days, as investors assess how the new government may impact trade policy.

NZD/USD collapsed during the early European morning Thursday after the New Zealand First party announced that it will back Labour to form a new government. The pair started falling ahead of the final decision, after it hit resistance at 0.7170 (R3), fractionally below the downside resistance line drawn from the peak of the 20th of September. It continued its tumble as soon as the official announcement was made. The rate broke two support lines in a row, to hit the 0.7055 (S1) obstacle. At the time of writing, NZD/USD is trading slightly above that line, where a dip may initially aim for our next support of 0.7030 (S2). Another break below the latter level may set the stage for extensions towards the psychological zone of 0.7000 (S3).

Switching to the daily chart, we see that the pair continues to trade within the wide sideways range that’s been in place since early June 2016, between 0.6880 and 0.7400. This keeps the bigger outlook flat in our view. Having said that though, given that on the 20th of September the pair got rejected from near the upper bound of the range and formed a short-term down path thereafter, we believe that the rate is poised to continue trading lower, at least within the aforementioned long-term range.

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Draghi sees a “window of opportunity” for reforms

Speaking yesterday, the ECB President made no reference to monetary policy. Instead, he focused on the need for structural reforms in the euro area. Given the absence of any policy signals, the reaction in the euro was relatively limited, though the currency did gain overall throughout the rest of the day. Market attention is now likely to shift to next week’s ECB gathering, where investors are expecting to find out at what pace the Bank will taper its QE purchases. Any reaction in the euro is likely to depend on whether the Bank will proceed with a so-called “dovish tapering”, whereby it begins to reduce its asset purchases without providing a clear roadmap for when the process may end, or whether it will provide such a timeline.

EUR/USD traded higher on Wednesday after it hit support at 1.1730 (S2). The rate emerged above the resistance (now turned into support) of 1.1780 (S1) but is still trading below the 1.1830 (R1) key barrier and the downside resistance line drawn from the peak of the 8th of September. In our view, this keeps the short-term outlook somewhat negative. If the bears manage to take charge again from near the 1.1830 (R1) barrier, we would expect them to aim for another test near the 1.1780 (S1) line. A dip below that level may pave the way for our next support of 1.1730 (S2). On the upside, a break above the crossroads of the 1.1830 (R1) hurdle and the aforementioned downside line is needed before we start examining the case for more bullish extensions.

Today’s highlights:

During the European morning, the UK retail sales for September are due out and the forecast is for both the headline and the core rates to have dropped notably, with the former expected to have entered the negative territory and the latter expected to have remained marginally within the positive area. Even though such prints could weigh on GBP somewhat on the news, we don’t expect them to prove a game-changer for BoE policy, considering that some softness in September appears normal following the exceptionally strong figures in August.

As for the speakers, we will hear from Kansas City Fed President Esther George. The only other event that could attract attention is a meeting between US President Trump and Fed Chair Yellen. This may be important for markets, as the President is interviewing candidates for the position of Fed Chair.


NZD/USD 19Oct2017 | Econ Alerts

  • Support: 0.7055 (S1), 0.7030 (S2), 0.7000 (S3)
  • Resistance: 0.7085 (R1), 0.7120 (R2), 0.7170 (R3)



EUR/USD 19Oct2017 | Econ Alerts

  • Support: 1.1780 (S1), 1.1730 (S2), 1.1690 (S3)
  • Resistance: 1.1830 (R1), 1.1880 (R2), 1.1940 (R3)




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source: FXGiants

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