NZDUSD Shorts Look Logical As NZD Plunges After Lower-Than-Expected CPI

The kiwi witnessed a steep fall against the greenback after reaching the highest level since July 13, 2016, at $0.73200.

On Monday (18/7), Statistics New Zealand reported that the consumer price index (CPI) rose by a less-than-expected 0.4% in the second quarter. The reading fell below the 0.6% forecast by the Reserve Bank of New Zealand and economists’ expectations of 0.5%. In a relatively more significant event, after eliminating fuel and house price changes, price inflation moved into negative territory – a contraction of 0.5 %. This reading(CPI excluding fuel and house prices) has been below zero for almost two years.  Since the Reserve Bank is meant to target inflation of 1-3%, this unexpectedly low statistic could trigger some easing monetary measures. Market forecasts are pricing in a probability of a rate cut by the RBNZ at its August meeting at 80% , up from a probability of 70% earlier.

While the inflation data has clouded the outlook for financial stability, the country’s rising house price still remains an unsolved problem without an efficient solution. This becomes even more serious given the general trend in other sectors towards price stagnation/deflation. According to data from the Real Estate Institute, Auckland house prices have rocketed by 85% in four years, due to the record high migration, low benchmark rates and housing under-supply. Additionally, the median national sale price rose 11% to $500,000 in June, compared with data from the same month a year ago. The number of properties sold edged up by 6% to 7,864. The RBNZ is now standing between the devil and the deep blue sea, with weaker inflation, and excessively strong house prices.

On the other hand, the U.S dollar is rallying on the rising expectation of a Fed rate hike. Statistics published on Friday (15/7) reported US retail sales increasing by 0.6% in June, signaling a pick-up in consumer spending, which drives about two-thirds of the world’s biggest economy. The continuing run of positive numbers from the U.S labor market also brought rate hikes by the Fed, back in focus.

The greenback also got a lift as data  on China‘s cooling property investment and slowing house prices, blunted optimism of an economic recovery prompted by last week’s figures. The ascending risk of weaker economic growth in coming months has boosted demand, for the greenback, which looks like the least troubled economy amongst other strugglers right now. As a result, the dollar index .DXY, ticked up 0.02% to 96.61.

The RBNZ has also stated last week that it shall release an unscheduled economic update on July 21, which has hinted at the bank’s plans to prepare the markets for an upcoming monetary move.

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Fig. NZDUSD H4 Technical Chart

On the H4 chart, the pair is following a downtrend after hitting the resistance at 0.73200. The two moving averages moving above the price chart indicate that a bearish market is in the making. The trend indicator encourages a short position with the red arrow casting a shadow on the price since June 7, 2016. The level 23.6% of the Fibonacci retracement has acted as solid support, but the price is anticipated to slump further and break through this bar to the level of 0.70672.

Trade suggestion

Sell stop at 0.71025, Take profit at 0.70672, Stop loss at 0.71161

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