New Zealand Dollar Tipped for Deeper Correction, Offering Respite to GBP/NZD 

- NZD/USD tipped for correction back to 0.63, 0.60 at Commerzbank.
- NZD/USD fall could lift GBP/NZD to 1.97 amid GBP/USD resilience.   
- ANZ sees dip below 1.92 beckoning to GBP/NZD, NZD/USD gains.

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The New Zealand Dollar suffered heavy losses Tuesday as investors turned cautious ahead of Wednesday's Federal Reserve (Fed) policy decision although some analysts tip the Kiwi for a more protracted correction lower that could offer the beleaguered GBP/NZD rate some respite from selling. 

New Zealand's Dollar was the second worst performing major currency Tuesday amid a risk-averse shift in price action that penalised commodity currencies, with the NZD/USD rate down two thirds of a percent while Sterling trod water against the greenback, handing the Pound-to-New Zealand Dollar rate a 0.68% increase and its strongest intraday gain since May 13.

Price action came as investors looked ahead to Wednesday's Federal Reserve (Fed) policy update that could be a dominant theme over the coming days given how the bank has been instrumental in driving the equally historic stock market recovery off March lows. NZD/USD has been the second largest beneficiary of that recovery rally behind only its antipodean cousin the Aussie so naturally was found leading risk currencies lower on Tuesday. 

Fed policy has played a decisive role in picking stocks, commodities and the Kiwi up off the floor in such convincing fashion since March so markets will scrutinise Wednesday's update closely for clues on what to expect from the bank up ahead. But the Kiwi's problems are bigger than just pre-Fed nerves because the NZD/USD rate has failed to overcome an important technical roadblock in a manner that could've set it up for further declines. 

Above: NZD/USD rate shown at daily intervals with 2018-2020 downtrend (red line above price line) and downtrend. 

"NZD/USD has rallied to and is failing at the 2018-2020 downtrend at 0.6592. Allow for slippage back to the 200-day moving-average at 0.6317 and the 3 month uptrend at 0.6090," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "GBP/USD there is scope for a test of the 78.6% retracement at 1.2818 (of the move down from the March peak). Given that we have a TD perfected set up on the daily chart and a 13 count on the 240 minute chart we suspect that this will hold. Dips lower should find initial support at 1.2468/86 ahead of the short term uptrend at 1.2330, which is expected to hold the downside."

NZD/USD was turned away from a two-year-long downward sloping trendline on the charts in early Tuesday trade after once failing to overcome it on Monday and is now tipped by Jones and the Commerzbank team to retreat back to its 200-day moving average at 0.6317. This is a potential boon for the Pound-to-New Zealand Dollar rate, which is an amalgamation of GBP/USD and NZD/USD, even more so now that Sterling has become more resistant to the downside against the greenback. 

An NZD/USD rate of 0.6317 would lift the Pound-to-New Zealand Dollar rate back to 2.0389 if accompanied by a GBP/USD rate that was testing 1.2818, while an NZD/USD rate of 0.6090 would lift GBP/NZD above 2.10 without sufficient offsetting declines in GBP/USD. However, well-established correlations suggest the Pound would also fall against the Dollar in an environment where NZD/USD is in such decline.

Above: Pound-to-New Zealand Dollar rate at daily intervals with Fibonacci retracements of March fall, 200-day average. 

A scenario in which GBP/USD falls back to 1.2486 would produce a GBP/NZD rate of 1.9765 if NZD/USD was around 0.6317, while if the latter falls to 0.6090 as GBP/USD declines to 1.2330, the Pound-to-Kiwi rate would hit 2.0246. The Pound-to-Kiwi rate will have retraced around 50% of its losses since March and risen back above its 200-day moving-average if it hits 2.0246.

ANZ strategists wrote Tuesday that they see GBP/NZD on route to 1.92 or below as the outlook for the Kiwi brightens. They tip NZD/USD to rise to 0.67, which would push GBP/NZD down to 1.9137 even with GBP/USD at 1.28880. If Sterling suffered a bout of isolated weakness while NZD/USD was at 0.67, for Brexit reasons or otherwise, the GBP/NZD losses would be even steeper.

"The Kiwi remains extremely well bid and is on its highs early this morning, having firmly crossed the 0.65 mark that it ended last week on. We continue to contend that short term, there is little standing in the way of further upside other than potential profit-taking. We have some fairly strong reservations about what the post-recovery global economy looks like, but for now, if the music’s playing, the Kiwi’s going to be dancing. The break of 0.6500 was technically very encouraging. From here it’s blue sky till 0.6765," says David Croy, a strategist at ANZ. "NZD/GBP: A slow grind higher is progressing. Now in the 0.5140/80 zone of congested resistance; a break through here invites a move to 0.52."

Above: Pound-to-New Zealand Dollar rate at weekly intervals with NZD/USD rate. 

Pound Sterling Live detailed last week how the Pound-to-Kiwi rate could be on its way to the bottom of a 1.9137-to-1.9682 range, although much about price action through the rest of this week could depend on the market response to Wednesday's Fed decision. Investors look to see the bank commit to continue underwriting the U.S. economic rebound in most literal sense.

Monday's decision to broaden eligibility for the Main Street Lending programme is indicative of a bank that considers its job as not yet done, but that doesn't mean that it can't disappoint investors Wednesday. 

If the market perceives the Fed to be stepping back or buying time so that it can observe the results of its work so far then it might feed Tuesday's correction in stock markets and commodity currencies like the Kiwi.

However, if it can convince investors that it's able and willing to go on carrying the weight of the world on its shoulders, then the nascent NZD/USD decline and Pound-to-New Zealand Dollar rebound could begin to peter out.