The Reserve Bank of New Zealand is has officially joined the fray of currency war. Unhappy with lofty levels of the NZD, as they see it, the central bank threatened with another intervention, aiming to send the Kiwi lower. Such action, if indeed implemented, would follow its earlier sell of the NZD, which took place in April, probably around the 0.86 handle (versus the USD). Financial authorities often engage in prolonged scare campaigns, trying to convince markets to bend to their wills, before pouring resources into this difficult battle. The Bank of Japan in the past couple of years is an example of the process might look like.
While today’s announcement might suggest that RBNZ means business, certain numbers suggest otherwise. The central bank admitted to selling NZD 256 million back in April, which is pitifully inadequate for Forex intervention. Even in a relatively illiquid currency, like the New Zealand Dollar, this is not amount likely to create lasting change. The daily turnover in NZD-USD in April was in the range of 10 billion a day. Unless the RBNZ commits more resources, it faces an uphill battle, but one that will cause plenty of volatility. Coming days and weeks will indicate just how determined the central bank is. Of course, if the recent weakness in commodity currencies becomes a major trend, we might all be spared the drama.
Intervention or not, some of the NZD crosses may be ready for corrective moves. The AUD-NZD, for example is trying to reverse its downtrend. Not much progress so far, but I am tracking the selloff with a buy order. My earlier order at 1.2175 has been moved down to 1.2085. If the price develops a discernible new minor top, I will adjust farther down. This could be happening right now, at just below 1.2000, making it the area to watch.
Meanwhile, I will look for breakouts from short-term consolidations at the start of the London session. The majors are normally best candidates for this trade on Friday, with focus on European currencies.
Mike K.