InvestMacro

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.

A sense of caution gripped financial markets on Wednesday as anxious investors kept a close eye on the US debt ceiling negotiations. Any fresh newsflow on the debt ceiling development is likely to influence sentiment which already remains shaky amid the uncertainty. In the meantime, there have been some interesting movements across the currency and commodity space.

Here are some technical setups to keep an eye on this week.

EURUSD eyes 100-day SMA

The EURUSD is bearish on the daily charts. Prices are trading below the 50-day SMA and have dipped below the 1.0845 support. Sustained weakness below this point could open a path toward 1.0800 – where the 100-day SMA resides. If 1.0800 proves to be unreliable support, the next key level of interest can be found at 1.0750.

GBPUSD balances above 1.2450

A breakdown could be on the horizon for the GBPUSD if a daily close below 1.2450 is achieved. Such a development could open a path towards 1.2370 and 1.2280, respectively. If prices can keep above 1.2450, this may trigger a rebound back towards 1.2550.

AUDUSD tests the support level

It has been a choppy week for the AUDUSD with prices trading within a range. Support can be found around 0.6630 and resistance around 0.6710. Prices are trading below the 50, 100, and 200-day Simple Moving Average while the MACD trades to the downside. A strong breakdown below 0.6630 may open a path toward 0.6570. Should prices push back above 0.6680, this may push prices back towards 0.6710 – a level just under the 200-day SMA.

USDJPY touches 200-day SMA

USDJPY bulls have been on a tear this week with prices touching the 200-day SMA on Wednesday. Bulls could switch into higher gear if this resistance is breached with the next key level of interest at 137.80. If the upside momentum runs out of steam, a decline back to 135.50 could be on the cards.

USDCAD choppy affair

If one word could describe the USDCAD’s price action this week, the best fit would be choppy. Prices have been all over the place, swinging between losses and gains. It may be wise to keep a close eye on the 1.3500 level. Sustained weakness below this point could trigger a decline towards 1.3410. If prices break above 1.3500, prices could challenge 1.3560.

Gold breaches $2000 psychological level

The strong daily close below $2000 could signal further weakness for gold in the short term with $1970 acting as a key point of interest. If prices can push back above $2000, gold may challenge $2015 and $2032, respectively.

Oil on standby?

WTI crude seems to be on standby mode with prices wobbling above $70. A rebound from this level could encourage an incline towards $73.50 and $75.50, respectively. Should prices slip below $70, this could see prices test $68 and $64.50, respectively.

The dollar caught our attention this morning after touching its highest level in five weeks against other major currencies.

It looks like dollar bulls may be back in the driver’s seat, especially after the solid rebound witnessed last week. But the key question is whether the US Dollar Index can maintain this bullish momentum or if this is just another dead cat bounce.

The low down…

After being suppressed by increasing Fed cut bets, the dollar has fought back with a vengeance thanks to political uncertainty and inflation worries. Concerns continue to mount over the US debt ceiling debate while a recent survey revealed that five-year inflation expectations among US consumers have jumped to a 12-year high.

Given how these forces already influencing the dollar, this could be another volatile week for the currency and here are 3 reasons why:

1. Safe-haven demand

The messy mashup of political uncertainty and global growth fears could send investors rushing towards the dollar’s safe embrace.

• Ongoing drama revolving around the debt limit saga is likely to leave investors on edge. Last Friday, the US Congressional Budget Office warned that the US faced a “significant risk” of defaulting in early June without a debt ceiling increase. Talks between US President Joe Biden and top lawmakers have been postponed to this week. Should the ongoing stalemate result in elevated uncertainty and turbulence across markets, this could increase the appetite for the dollar.
• Concerns still linger over global economic growth. Throughout this week, investors will be presented with key economic reports from major economies ranging from Europe, the United Kingdom, and China among many others. A set of disappointing figures may fuel risk aversion as growth fears intensify, and the flight to safety may propel the dollar higher.

2. Fed speeches + US data 

After US annual inflation dipped below 5% in April, investors will be keeping a very close eye on Fed speeches and data for more clues on the Fed’s next move.

• A host of Fed speakers could influence the dollar’s near-term trajectory. Although US inflation has dipped below 5%, the jobs market remains tight with core and headline monthly inflation data still sticky. If policymakers strike an overall hawkish note, this could support the dollar further. However, any whiff of doves or further hints the Fed pausing may empower dollar bears.
• It will be wise to keep an eye on the latest US retail sales figures, industrial production, and US weekly initial jobless claims. A disappointing set of reports may fuel expectations around the Fed cutting rates down the road, weakening the dollar. If the figures exceed forecasts, it may fuel speculation around the Fed keeping rates higher for longer.

3. USDInd Bullish breakout

Dollar bulls marked their territory after securing a strong daily and weekly close above the 102.35 resistance level.

Nevertheless, the resistance around 50 and 100-day SMA could still weaken bulls before prices test the 103.00 level. Should prices push above this point, the next key level of interest on the US Dollar Index can be found at around 103.80 and 104.00. Alternatively, a decline back under 102.35 could signal a selloff towards 101.50 and 100.72, respectively.

The Japanese Yen has appreciated against every single G10 currency since the start of May, with the USDJPY dropping over 1% month-to-date.

But before we take a deep dive into what forces may boost or weaken the yen, let’s have a glance at the list of key economic reports and events that could influence currency markets next week:

Monday, May 15

• EUR: Eurozone industrial production
• JPY: Japan April PPI
• USD: Empire Manufacturing, Atlanta Fed President Raphael Bostic speech
• GBP: Bank of England chief economist Huw Pill speech

Tuesday, May 16

• CAD: Canada April CPI
• CNY: China retail sales, industrial production
• EUR: Eurozone Q1 GDP, Germany ZEW survey expectations
• GBP: UK jobless claims, unemployment
• USD: US April retail sales, industrial production, Fed speech

Wednesday, May 17

• EUR: Eurozone April CPI
• JPY: Japan Q1 GDP, Industrial production
• GBP: BoE Governor Andrew Bailey speech

Thursday, May 18  

• AUD: Unemployment change
• USD: Initial jobless claims, existing home sales

Friday, May 19  

• CAD: Canada March retail sales
• JPY: Japan April CPI
• EUR: ECB President Christine Lagarde speech
• USD: New York Fed President John Williams speech
• G7 leaders meet in Hiroshima

Now, here are 3 reasons why we’re keeping a close eye on the USDJPY:

1. Top tier Japan data

The new Bank of Japan (BoJ) Governor Kazuo Ueda recently mentioned that the BoJ would start unwinding its monetary easing once the 2% inflation target can be achieved in a sustainable and stable manner.

This could add more flavour to the incoming data, with any whiff or hint of a potential policy pivot in the future rocking FX markets. It may be wise to keep a close eye on:

• Japan Q1 2023 GDP report due on Wednesday, 17th May.

Markets are forecasting GDP to expand 0.8% quarter on quarter in annualized terms, up from a 0.1% expansion in the final quarter of 2022. A report that meets or exceeds expectations could boost confidence in Japan’s economic recovery, providing an argument for the BoJ to evaluate and potentially tweak its current stimulus policy. However, a disappointing GDP print could provide more evidence that the current recovery remains weak, keeping BoJ doves in power.

• Japan April CPI report due on Friday, May 19th

The annual inflation is expected to expand to 3.5% in April from the 3.2% witnessed in the previous month. Regarding the core CPI excluding fresh food, this is expected to jump 3.4% year-on-year, up from the 3.1% rise in March.  Looking at the core CPI excluding both fresh food and energy, markets are forecasting this to rise 4.2%, a noticeable rise from the 3.8% in the prior month.

Ultimately, more signs of rising inflationary pressures could fuel speculation around the BoJ unwinding its ultra-loose monetary policy. Traders are currently pricing in a 72% probability of a 10-basis point hike by the December BoJ meeting, it will be interesting to see how the incoming data influences expectations.

2. More clues about the Fed’s next move

Investors will be keeping an eye on fresh clues on the Fed’s next move, especially after the annual increase in US inflation slowed to below 5% in April for the first time in two years.

• Fed speeches

A chorus of Fed speakers will be under the spotlight ranging from Rachael Bostic, to Loretta Mester and John Williams among others. With annual US inflation cooling, it will be interesting to hear what policymakers have to say. Any dovish remarks and more hints of the Fed pausing hikes could weaken the dollar, dragging the USDJPY lower.

• US data cocktail

Much attention will be directed towards the latest US retail sales, industrial production and US weekly initial jobless claims, especially after the Fed stressed that incoming data would influence monetary policy decisions. A disappointing set of reports may further dampen confidence over the US economy and support expectations around the Fed cutting rates down the road. If the figures print above market forecasts, it may rekindle speculation around the Fed keeping rates higher for longer.

3. Major USDJPY breakout on the horizon

The USDJPY remains trapped within a 200-pip range on the daily charts.

Although prices seem to be respecting a bullish channel, a fresh fundamental spark is needed before the trend resumes or reverses. A strong breakout and daily close above 135.50 could open a path toward major resistance around the 137.80/138.00 regions. Should prices slip below the 133.50 support, the USDJPY could tumble towards 132.90 and 131.20, respectively.

At the time of writing Bloomberg’s FX model forecasts a 73% chance that USDJPY will trade within the 132.84 – 136.40 range over the upcoming week.

Zooming out to the monthly timeframe, strong resistance can be found at 138.00 and support at 130.00. A move back below 133.50 could signal a decline toward 130.00 and 127.20, respectively. Should 138.00 prove to be unreliable resistance, this could signal an incline back toward 149.00 in the medium to longer term.