Fundamental Analysis of NZD/USD for January 18, 2019

NZD/USD has been quite volatile and bearish recently while residing above 0.6700 area with a daily close. NZD has been struggling to regain momentum over USD whereas US positive economic reports provided USD with support.

NZD has been quite impressive with the recent counter-move against USD but recently could not sustain the impulsiveness it had earlier when trading above 0.6700. December's New House Sales report was published with the sharpest decrease in the recent seven years. This undermined NZD in the pair. This week NZD was quite positive with the economic reports, but it did not quite help the currency to gain momentum. Today Business NZ Manufacturing Index report was published with an increase to 55.1 from the previous figure of 53.7, which helped the currency to establish certain bullish counter-move in the pair but it is expected to be short-lived. On the other hand, USD is likely to maintain momentum in the coming days. As NZD investors are currently waiting for the US-China efficient trade deal. If the deal is concluded, NZD is going to pick up steam in the hsort term after weakness.

On the other hand, USD has been quite optimistic and positive with the recent economic events and reports which helped the currency to sustain the bearish pressure in the pair. Citing FED's Quarles, inflation is very well contained and data on the domestic economy is also quite positive. Solid fundamentals are sure to prop up the economy in the medium term. After raising the interest rate 4 times last year, this year FED Chair Powell is going to take a patient approach with at least of 2 rate hikes which are currently being discussed. According to FED's official Charles Evans, a pause in rate hike is crucial amid looming uncertainty. Recently Philly FED Manufacturing Index report was published with a significant increase to 17.0 from the previous figure of 9.4 which was expected to be at 9.7 and Unemployment Claims report was published with a positive result of a decrease to 213k from the previous figure of 216k which was expected to increase to 219k.

Meantime, USD is expected to dominate NZD further in the coming days. Any soft economic report from the US will provide grounds the bullish momentum again in the future.

Now let us look at the technical view. The price is currently heading towards 0.6700 area after a breach below the dynamic level of 20 EMA. As of the current price structure, the price is expected to move lower towards 0.67. If any bearish rejection with a daily close is observed, certain bullish pressure towards 0.70 is expected in the future. As the price remains above 0.6700 area, the bullish bias is expected to continue.

SUPPORT: 0.6500, 0.6700

RESISTANCE: 0.6850, 0.6950, 0.70

BIAS: BULLISH

MOMENTUM: VOLATILE

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Experts expect the yen to strengthen against the backdrop of a weaker dollar

Today, the yen became cheaper against the dollar after The Wall Street Journal reported that the US authorities are discussing the possible abolition of import duties on Chinese goods, although the US Treasury later denied this information.

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According to a number of experts, despite optimistic expectations regarding the resolution of trade disputes between Washington and Beijing, the situation in the future will not be in favor of Greenback.

"We believe that the effect of fiscal stimulation in the United States will gradually come to naught, and investors will eventually lose their desire to buy risky assets, in connection with which the yen will strengthen. We expect the USD / JPY pair to reach 103 over the next 6-12 months," said experts at Citigroup financial conglomerate.

"The Japanese currency is very cheap compared to its long-term fair value, and investments in it, in our opinion, are more profitable than in euros," they added.

Citigroup has revised down its forecast for the dollar index for 2019 from 93.33 to 92.56.

Analysts at Bank of America Merrill Lynch (BofAML) adhere to a similar point of view.

"We believe that in the foreseeable future, interest in risky assets will decline due to the fact that the growth rate of the world economy may have reached its maximum," they noted.

According to the BofAML forecast, by the end of the year, the USD / JPY pair will drop to 101.

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Media: the US may waive duties on Chinese goods

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According to the newspaper The Wall Street Journal, the United States is considering the possibility of abandoning the protective duties previously imposed by Washington on the import of Chinese goods. The White House administration sees such a move as a way to calm global financial markets and encourage Beijing to make deeper and longer-term concessions in a trade war.

With the proposed measures do not agree on US Trade Representative Robert Lighthizer. He believes that China may perceive such a step as a weakness on the part of Washington.

The idea of partial cancellation of duties or complete rejection of them was proposed by US Treasury Secretary Steven Mnuchin. The politician argues that such a policy of easing trading conditions will help succeed in advancing trade negotiations with China and enlist Beijing's support in conducting joint longer-term reforms.

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Euro bets on ECB

Weak statistics on the German economy and the mention of Mario Draghi of the word "recession" led the single European currency into the red zone for the week by January 18. And let the head of the ECB argued that the recession is not a question, we need to talk about a smooth landing, the financial markets are rather shy. If German GDP shows the worst dynamics since 2013, and its European counterpart, judging by business activity, closes the fourth quarter worse than the modest third (+ 0.2% q / q), then why buy EUR / USD? Wouldn't it be better to continue to keep the US dollar in investment portfolios?

Theoretically, the slowdown in the US economy, the pause in the process of normalizing monetary policy and the growing recession risks should weaken the position of the bears on the main currency pair. However, while macroeconomic statistics do not confirm the idea of a significant loss in the rate of US GDP, and the yield curve has not inverted, it is too early to panic. Yes, the indicator predicted the last 7 recessions of 7, yes, the macro statistics are retrospective, and the indications of financial markets are of a predictive nature, but until the thunder breaks out, the peasant will not cross himself.

Dynamics of the US yield curve

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Fed officials are beginning to pay increased attention to the dynamics of stock indices. In their opinion, the high turbulence of the stock market, the growing risks of a slowdown in the global economy and global demand, as well as tight financial conditions and a strong dollar are strong arguments in favor of slowing monetary restriction. However, looking at the peak of the USD index at the end of 2018, it can be concluded that the factor of the "pigeon" rhetoric of the FOMC plenipotentiaries is already partially taken into account in the EUR / USD quotes.

A single European currency would be nice to get up on its feet, and a week by January 25 may be decisive in its fate. In its course, the results of the ECB meeting and figures on business activity for January will be known. The strong start of purchasing managers' indices in 2019, coupled with the preservation of the Governing Council's optimism about the recovery of GDP and inflation of the currency bloc, can inspire EUR / USD "bulls" to attack. On the contrary, the inability of PMI to implement moderately positive forecasts of Bloomberg experts and hints of Mario Draghi on the expansion of the stimulus package, if necessary, will return the initiative to the bears.

The course of negotiations between the US and China can also contribute to its dynamics. If the idea of Steven Mnuchin to lift import duties in order to calm the financial markets comes to life, then we are expected to sell safe-haven assets, including the US dollar. On the contrary, the escalation of the conflict will hurt the euro.

Technically, the bulls in EUR / USD do not leave hopes for the implementation of the Bat pattern with a target of 88.6%. To do this, they need to bring the quotes of the pair outside the consolidation range of 1.1265-1.1485 and rewrite the January maximum. On the contrary, the inability of euro buyers to keep quotes above $ 1.14 will increase the risks of continuing the pair's southern hike.

EUR / USD, the daily chart

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EUR and GBP. The problems in the UK economy is increasing. Euro buyers disappointed with statistics

The euro remained traded in a narrow side channel paired with the US dollar, but held its position after the release of the next weak fundamental statistics for the eurozone.

The reduction in the positive balance of the current account of the eurozone's balance of payments in November 2018 again indicates that the eurozone economy is slowing again by the end of the year and is unlikely to show good growth rates in early 2019. The sharp decline compared with October and the level of 2017 is bad news for the European Central Bank, which recently more and more often speaks not about raising interest rates, but about the need to further stimulate the economy.

Important is the fact that, in the main, a reduction in the positive balance of payments was caused by a reduction in trade in goods due to an increase in imports.

If we add to all the data for this week the likelihood of a new trade war between the US and the EU, the prospects for the European currency at the beginning of this year do not seem so rosy as before.

According to the report of the European regulator, the positive balance of the current account of the balance of payments in the eurozone in November 2018 amounted to 20 billion euros against 27 billion euros in October. Compared with November 2017, the decline is impressive, since at that time the surplus was 35 billion euros. The surplus of trade in goods in November fell to 18 billion euros from 31 billion euros in November 2017.

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Weak data for the euro area all week does not allow euro buyers to form a larger upward correction, and, ultimately, everything could end in another wave of falling risky assets.

As for the technical picture of the EUR / USD pair, the bears are trying to resume the downward movement in the market after the unsuccessful attempt of the bulls to return to the game. A break of 1.1375 may lead to a larger decrease in risky assets with the renewal of lows around 1.1340 and 1.1310. In the case of another false breakdown in the area of 1.1375, bulls can willingly return, which will lead to a powerful upward impulse with a test and a breakthrough of the intermediate resistance 1.1415 and the main goal of updating the maximum of 1.1450.

The British pound remained under pressure and corrected after yesterday's growth, based more on expectations than on facts.

Weak data on retail sales in the UK once again indicated a slowdown in economic growth at the end of 2018. According to the report of the National Bureau of Statistics ONS, retail sales in the UK in December 2018 decreased by 0.9% compared with the previous month. This is another confirmation that the growth momentum of the UK economy is fading. Given the situation with the EU and Brexit, it is unlikely that in the near future it will be possible to expect a change in the situation, as consumer confidence decreases, as do their expenses.

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