The NZD/USD Outlook continues to show a strong bullish trend, with the NZD/USD index tracking a higher path against the US Dollar. The index currently stands at USD 110.6, with the US Dollar also rising as we head into the second week of August.
The retail market is showing more bullish signs, with retail sales figures on a decline versus last year. Retail sales are forecast to pick up slightly this month, but then begin to fall again. If this trend continues, the NZD/USD Index should rise against the US Dollar in the coming weeks. This is an important indicator that the Reserve Bank of New Zealand (RBNZ) has started to feel the pinch from the weakening retail sector and is beginning to tighten policy.
The Reserve Bank of New Zealand has been tightening the purse strings to reduce inflation, and the retail sector is starting to feel the effect. If the NZD/USD Index continues to rise and if the Reserve Bank continues to tighten its purse strings, it will mean more pressure on the NZD/USD Index in the coming months.
The outlook for the NZD/USD Index looks quite bearish when we consider the recent strength in the Japanese and European economies. In a report on Wednesday, Bloomberg Intelligence noted that European growth was expected to continue to outpace that of Japan, while growth in the United States remains muted, and falling unemployment makes the US Dollar more attractive than previously. The US Dollar is likely to fall further against the NZD/USD Index, and the RBNZ could opt for a rate cut or a hold at the FOMC. It is not clear if these actions will take the NZD/USD Index to the upside.
The outlook for the NZD/USD Index is particularly bearish when compared to the US Dollar, and is likely to fall sharply against the US Dollar this month and the next. As a result, the NZD/USD Index would need to be supported to appreciate, and would likely fall back if the RBNZ was to tighten its policy further.
If the NZD/USD Index continues to trend lower, a breakout target of NZD/USD100 is likely. At this level the NZD/USD Index would probably enjoy support from the US Dollar, and other major global currencies. A break above NZD/USD100 would signal that investors are confident that the Reserve Bank of New Zealand has tightened its purse strings. A break below NZD100 would indicate that the Reserve Bank has loosened its purse strings too soon and could set off a bearish uptrend for the NZD/USD Index.
In summary, we believe that the RBNZ is likely to increase the pressure on the NZD by tightening its policy, which will weaken the Retail sector in Australia. If the NZD/USD Index does continue to trend lower, we believe that the NZD/USD Index will likely fall further against the US Dollar and remains on a weaker upward trend in the second half of this year, while the US Dollar remains undervalued.
The NZD/USD Index is likely to suffer significant resistance around NZD100 against the US Dollar, with support on the upside from the US Dollar and other major currencies. If the NZD/USD Index breaks above NZD100 the Reserve Bank could choose to ease its monetary policy further, pushing the NZD/USD further down. A break below NZD100 would indicate that investors are confident that the Reserve Bank has tightened its purse strings too soon. and could set off a bearish uptrend for the NZD/USD Index.
For the retail sector the NZD/USD Index will likely decline at a slower rate than other major indices. In this instance it is important to look for support in the form of the US Dollar, the Australian Dollar, and the Euro. An uptrend is unlikely for this sector in the second half of this year, but it should bounce back strongly in the fourth quarter.
In the absence of additional easing, we believe that the retail sector will continue to outperform in the second half of this year, with oversold levels potentially leading to a reversal pattern for the NZD/USD Index in the fourth quarter. This reversal may be triggered by an exit or reversal in the current downtrend. Oversold conditions will continue to prevail until the fifth quarter, causing the NZD/USD Index to weaken and then reverse upwards, although the NZD/USD Index will be supported during the second half of this year by a stronger US Dollar.
In summary, the RBNZ may be forced into action if there is a further deterioration in the retail sector in the run up to the Reserve Bank of New Zealand’s December FOMC meeting. If the Reserve Bank chooses to tighten its monetary policy after the meeting, the NZD/USD Index will likely suffer a dramatic decline, but a more balanced outlook suggests that the index will remain resilient as the second half of the year progresses.