The Reserve Bank of New Zealand (RBNZ) will meet on Wednesday this week to discuss monetary policy at their latest interest rate decision meeting. Although the central bank hasn’t met since November 11th, 2020, they are expected to leave rates unchanged at a record low of 0.25%. In addition, they are expected to maintain their Large-Scale Asset Purchase Program at NZ$100 billion. The statement and the press conference to follow should be interesting. The RBNZ’s has signaled that their inflation target is 1-3%. In Q4 2020, the inflation reading was 1.4% (QoQ). In addition, most economic data, including employment and manufacturing, has improved since November. The central make may have to revise their economic forecasts given the strong data as of late. On the coronavirus front, after lasts weeks impromptu 3-day lockdown in Auckland due to a family contracting the UK variant, no other people were determined to have contracted the virus. With a population of 5 million, there have been less than 2,400 cases and only 26 deaths. Vaccinations have begun, and New Zealand expects to vaccinate everyone within a year.
US Fed Chairman Jerome Powell will be in the spotlight on Tuesday as he testifies before Congress in his semi-annual Monetary Policy Report on Tuesday. The rhetoric from Fed members over the past 2 weeks has been that the Fed will continue to keep rates low for an extended period and that monetary policy will be keep accommodative for some time. There have been signs of inflation in the economic data for January and yields have reached post-pandemic highs, however Fed members have continued to say that this inflation is unsustainable and transitory. Powell has also said that the Federal government must do more, including the approval of the $1.9 trillion stimulus package proposed by Joe Biden. Economic data has been strong, ex-jobs, which Powell may address. Coronavirus cases and hospitalizations have been dropping throughout the US and vaccinations have begun. However, there is still concern as to whether the coronavirus variants will raise these numbers in the spring.
On a daily timeframe, NZD/USD has been moving higher from its pandemic lows on March 19th at 0.5469 and is currently putting in highs not seen since April 2018. The pair traded sideways for most of the summer of 2020, before moving higher again in an orderly upward sloping channel in the fall of 2020. The new year started with NZD/US making a new 2 ½ year high on January 6th at 0.7315 before consolidating in a symmetrical triangle until February 9th, forming a pennant. The pair then broke above the top, downward sloping trending of the pennant. On Friday, price moved aggressively higher and today (Monday), NZD/USD took out the January 6th highs, putting in a current high of 0.7338. However, notice that the RSI is diverging with price, an indication that the pair may be ready for a pullback. The target for a pennant formation is the length of the flagpole added to the breakout point, which is near 0.7900.
Source: Tradingview, FOREX.com
On a 240-minute timeframe, the chart shows a closer view of the symmetrical triangle of the pennant, in addition to the breakout to new highs. Resistance is at the 127% Fibonacci extension from the January 6th highs to the January 18th lows anear 0.7376. Horizontal resistance from February 2018 provides the next resistance at 0.7430 and then the 1.618% Fibonacci extension from the previously mentioned timeframe at 0.7453. First support is at February 16th highs near 0.7268, before the pennant trendline , which now crosses bear the February 17th lows of 0.7158.
Source: Tradingview, FOREX.com
NZD/USD has broken out above recent highs and targets near 0.7900! However, close attention must be paid to the RBNZ interest rate meeting and US Fed Chairman Powell’s testimony to Congress this week. If the RBNZ turns less dovish and the Fed remains more dovish, the pair could move higher quickly. However, this will also depend of the direction of the variants of the coronavirus and the vaccine rollout.