NZDUSD Bulls Eye 0.7200 Amid Dollar Weakness

• NZDUSD rallies to one-month highs.
• Dollar softens as yields retreat. 
• Rate hike talk in New Zealand Impact.

The New Zealand dollar started the week on a strong footing strengthening across the board amid growing expectations that the Reserve Bank of New Zealand will hike interest rates next month. The NZDUSD pair has since powered through the 0.7100 handle to one-month highs as the US dollar remains on the defensive.

NZDUSD technical analysis

The pair is up by more than 0.5% for the day as the US dollar remains under pressure amid retreating Treasury yields from four-month highs. The upward momentum on the NZD has formed after powering through the 0.7130, the previous resistance level.

Given the strength of the upward momentum, NZDUSD looks set to power to 07170, the next substantial resistance level. A rally followed by a close above the level should pave the way for bulls to make a run for the 0.7200 handle.

On the flip side, support on any pullbacks is seen at the 0.7075 level, below which NZDUSD could tank to lows of 0.7020.

What’s driving the NZDUSD rally?

US dollar weakness

The NZDUSD has been trending up for five consecutive days after bouncing back and retaking the 0.7000 handle. The follow-through traction has been strong, especially on the US dollar, experiencing some fresh supply after strengthening to more than one-year highs last week. A pullback in Treasury yields from four-month highs has continued to fuel greenback weakness, consequently sending the NZDUSD pair higher.

However, the NZD has also come under pressure amid growing concerns over rising inflation which could derail the global economic recovery. Disappointing Chinese data showing that economic growth decelerated sharply from 7.9% to 4.9% in the third quarter have also weighed heavily, preventing the NZD from gaining substantial ground against the greenback.

Nevertheless, the pair has continued to edge higher, powering through the 200-day moving average, affirming ongoing NZD strength. Solid economic releases out of New Zealand have also helped affirm sentiments on the NZD against the greenback.

Rate hike & tapering talks

NZ Consumer Price Index data showing inflation jumped faster than expected at 4.9% year-over-year continues to arouse suggestions the Reserve Bank of New Zealand could be called into action. With inflation getting out of hand, there are suggestions that the central bank could be forced to hike interest rates next month.

The market has already started pricing a 25 basis points rate hike in November, which explains why NZDUSD is racing higher in the market. Chatter-around rate hikes should continue to fuel New Zealand Dollar Strength across the board.

However, the gains could be limited given the ever-growing prospects that the US Federal Reserve will start bond tapering in November. The Prospects of the FED reducing asset purchases should limit dollar losses which could cap further upside action on the NZDUSD. Additionally, suggestions that the US will start rate hikes next year should also limit dollar losses against the NZD.

Bottom line

Given that NZDUSD has moved substantially after bouncing back from below the 0.6900 level, a lot of caution is crucial going forward. The bullish biasness on the dollar remains intact despite the recent pullback from multi-year highs. The prospects of the dollar bouncing back are high, which could limit further NZDUSD price gains.

Looking ahead, focus is also on scheduled speeches by Federal Reserve officials for hints on when the US will begin asset tapering.