The kiwi got smacked today.
NZD/USD is down nearly 2% this week, with a big chunk of that coming overnight when the pair dropped 1.2% straight into a key support zone of 0.5800. If this level gives way, the downside risk opens up fast, all the way toward the 0.5600 handle.
Why did NZD fall so hard?
Everyone expected the 25bps cut by the RBNZ from 3.25% to 3.0%. What took the market by surprise was the tone that came with it.
RBNZ went full dovish: They lowered their projected floor for rates to 2.55% down from 2.85%, signalling more easing to come.
Split inside the committee: Two members actually wanted a bigger 50bps cut, showing how cautious the Bank really is.
Economic outlook cut down: Forecasts for growth, jobs, and wage growth all got marked lower, confirming a weaker picture for New Zealand’s economy.
Markets wasted no time repricing. Traders are now betting on another cut in October, and by November, markets are fully pricing in more easing.
What this means for traders
This week’s action confirms what my strength meter flagged earlier: NZD is the weakest currency out there right now. And the RBNZ just gave bears even more ammunition.
But here’s the setup I'm watching.
If the support of 0.5800 breaks it could lead to some further downside, potentially down to 0.5600 or 0.5550.
Alternatively, if the price finds support and rebounds then the recent highs near 0.6000 could be a resistance level to watch.
My thoughts
If the kiwi is going to come under further pressure fundamentally I could look to try and take advantage of the weakness against stronger currencies. It may turn out to be that NZD/USD remains choppy due to both economies being weak. So we could turn to another market. For instance the EURO and GBP is strong, this could be where we target the NZD weakness.