Trade Of The Week: 3 Reasons Why NZDUSD Could Breakout

This could be a wild week for the New Zealand Dollar thanks to fundamental and technical forces.

The New Zealand dollar is the best-performing G10 currency month-to-date, gaining roughly 1.7% against the dollar.

On the fundamental side, the NZD bulls continue to draw support from expectations around a 25-basis point hike by the Reserve Bank of New Zealand (RBNZ) at its May meeting. Taking a glance at the technicals, prices remain trapped within a wide range with key support at 0.6150 where the 200-day SMA resides while resistance is just above the 100-day SMA at 0.6320.

A major breakout could be on the horizon for the NZDUSD and here are 3 reasons why…

1. Reserve Bank of New Zealand rate decision

Markets widely expect the RBNZ to raise interest rates by 25bps, taking the cash rate to 5.5%. This would be the highest among G10 nations and 12th straight increase.

Although inflationary pressures slightly cooled in the first quarter of 2023, policymakers still see more upside risks due to severe weather events. Investors will also keep a close on the bank’s new projections for growth and inflation which could offer fresh insight into the RBNZ’s next move. Any hawkish bias has the potential to strengthen NZD bulls.

• Buying sentiment towards the New Zealand dollar may receive a boost if the RBNZ moves ahead with the expected 25 bps rate hike and signals further increases. This may push the NZDUSD towards the 0.6380 resistance.
• If the RBNZ shocks market with a 50-basis point hike like what was witnessed back in April, this could send the NZD surging across the board, pushing prices beyond 0.6830.

2. Extreme dollar volatility

This could be an explosively volatile trading week for the US dollar thanks to the US debt limit negotiations, Fed minutes, speeches, and key US economic data.

Despite the recent news around debt limit talks resuming on Monday, investors are likely to remain jittery as the window to strike a deal shrinks by the day. The Fed minutes and speeches from policymakers could provide more clues about the central bank’s next move. On top of this, much attention will be on the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure – especially after the central bank stressed that incoming data would influence monetary policy decisions. With so many forces influencing the dollar, this could translate to heightened volatility.

• If dollar bulls dominate the scene this week, this could see the NZDUSD decline back toward the 200-day simple moving average at 0.6150.
• Should all the combined forces translate to a weaker dollar, the New Zealand dollar has a stronger potential to experience a bullish breakout.

3. NZDUSD in breakout mode?

The NZDUSD has been trapped within a wide range since early February 2023.

The first major resistance can be found at 0.6380 and secondary resistance at 0.6310. Looking at support levels, there is strong support at 0.6150, followed by another level of defence at 0.6100. It seems that the currency pair needs a potent fundamental spark to experience a strong breakout from this current range.

Should bulls seize the driving seat this week, prices could experience a breakout above 0.6310 and 0.6380, respectively. A weekly close above 0.6380 could signal a further incline toward 0.6460. Alternatively, if 0.6310 proves to be reliable resistance, bears may target the 0.6150 support – where the 200-day SMA resides and 0.6100.