NZD/USD Fails To Follow Through Following Wednesday’s Advance

NZD/USD reversed sharply higher on Wednesday, inspired by a weaker dollar following the US CPI and retail sales release. The pair posted a bullish engulfing candle on a daily chart to wipe out early week losses but failed to follow through to the upside with a doji print on Thursday to signal exhaustion.

The pair traded in a range for most of the day despite a continuation lower in the trade-weighted dollar index (DXY). Resistance at 0.7238, marking the December high, had held the exchange rate lower. A bearish range break attempt was seen shortly after data from New Zealand as quarterly retail sales figures were reported short of expectations.

December quarter retail sales were reported to rise 0.8%, less than the forecast gain of 1.1%. Further adding to the disappointment was a downward revision in the prior quarter to indicate a rise of 0.8% versus the previously reported gain of 0.9%. Excluding autos, sales rose 0.6% in the fourth quarter versus an expected gain of 0.9% and against a downward revised 0.2% rise in the prior quarter. Statistics New Zealand stated the motor vehicle and parts retailing industry contributed to the largest increase in both volume and values. Out of the 15 industries monitored, 11 were reported to have higher volumes of sales.

The Business NZ manufacturing index declined to 51.6 in January. There was a downward revision for December to 54.2 from 54.5 reported previously.

The Philadelphia Fed manufacturing index improved to the best level seen since 2011 with a reading of 43.3 as compared to the analyst consensus for a decline to 18.5. Weekly unemployment claims came in ahead of expectations with 239,000 claims filed in the week ending February 11 versus an expected 243,000. Building permits were reported at an annualized 1.29 million in January, up from the consensus of 1.23 million.

The economic calendar pertaining to NZD/USD remains light on Friday, the only scheduled release is the leading index released by the Conference Board at 10:00 EST.

The US dollar remained weak with a steady decline in the trade-weighted index. DXY reversed sharply after better than expected CPI and retail sales figures on Wednesday and the decline today has taken the index into negative territory for the week. The weekly close will be important as a close near current levels would print a shooting star candlestick pattern to negate last week’s bullish engulfing candle.

Rate hike probabilities as priced in by the futures markets fell sharply on Thursday for the month of March. Fed chair Yellen’s testimonies to Congress on Tuesday and Wednesday had suggested the Fed may raise rates as soon as March, leading the odds to jump to 31% over the two-day period. Most of the gains from the early week have been wiped out with the futures market indicating a 17.7% chance for an increase in March by the end of trading on Thursday.

Upside resistance for NZD/USD remains at the December high of 0.7238 and following Thursday’s exhaustion candle, and upside breach may appears less likely. Further resistance is found at 0.7234 marking the July high. The level had triggered a turn lower last week, resulting in sharp losses ahead of yesterday’s reversal. To the downside, the 200-period daily moving average will be a big hurdle for NZD/USD bears. The indicator currently resides at 0.7127 and carries confluence with the 50% Fibonacci level measured from late December lows to last week’s high.

NZD/USD Daily Chart

NZDUSD Daily Feb 16

Jignesh is an analyst and trader, specializing in currencies and commodities. He utilizes a macro view as well as a proprietary method of pattern recognition that is based on the principles of Elliott wave. His focus is to assess strength in trends, and perceiving high potential turning points in the markets. He brings over 4 years of experience in his current role.