Here’s how NZD/USD price could drop 3.5% this week

Here’s how NZD/USD price could drop 3.5% this week
  • Dovish statement from the Reserve Bank of New Zealand facilitates bearish pressure on the kiwi
  • The rising number of new COVID-19 infections may push markets into the risk-off sentiment
  • NZD/USD created a bearish weekly candle which may result in the pullback to $0.62

Although the NZD/USD price closed the week in positive territory, the price created a bearish candlestick pattern that may facilitate a deeper pullback this week. Moreover, the rising number of new COVID-19 infections and dovish RBNZ may facilitate a deeper pullback. 

Fundamental analysis: Bearish RBNZ, new COVID-19 infections on the rise again

On Wednesday, the Reserve Bank of New Zealand (RBNZ) met and ultimately left its key interest rate at 0.25%. The bank reiterated a warning that the country’s growth was still at risk because of the current border closure.

As a result, the RBNZ has joined its European and American counterparts in offering more stimulus to help its economy to recover. In addition, the bank hinted that the kiwi is trading higher than it should. 

“The appreciation of New Zealand’s exchange rate has placed further pressure on export earnings,” the bank said in a statement. 

As expected, NZD/USD moved lower following the statement. We expect the kiwi to trade under pressure in the coming days as a result. 

Separately, the number of new coronavirus infections has significantly risen in the past week or so. Last week, the World Health Organisation reported the largest single-day increase in coronavirus cases by its count with over 183,000 infections reported within 24 hours. 

“The severe global economic disruption caused by the COVID-19 pandemic is persisting, leading to lower economic activity, employment, and inflation abroad and in New Zealand,” RBNZ said on the COVID-19 outbreak. 

Global equities moved lower at the end of the week, which also dragged commodity currencies down. If the risk-off market sentiment persists, we may see significant downside pressure exercised on the kiwi. 

Technical analysis: Bearish chart formation

Despite a strong performance on Monday when NZD/USD surged over 1%, the dovish RBNZ and worsening coronavirus situation dragged the pair lower at the end of the week. As such, the kiwi erased the majority of its gains to close only 0.22% in the green. 

However, the long wick extending to the upside and the lower close resulted in the creation of a shooting star candlestick pattern. This a bearish chart formation, signalling that the bulls’ momentum is fading and the reversal may be coming soon. 

NZD/USD weekly chart (TradingView)

Moreover, the pair failed at $0.6520 where the 100-WMA is located. This will only add more selling pressure as the bears target the $0.62 handle.

The dovish scenario is in line with ANZ’s projections that the kiwi may drop 15% before the year ends. 

Summary

NZD/USD price closed the week barely in the positive territory on the dovish RBNZ and the rising new COVID-19 infections. The pair is now likely to come under pressure in a week ahead of us as the sellers eye levels around $0.62. 

By Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to Invezz. His passion has given him first hand experience of trading, while his writing means he understands the market forces and wider regulation.
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