NZD/USD skids on China concerns, Nikkei bounces into US tech earnings

• NZD/USD tumbles to multi-month lows on renewed China concerns
• USD/CNH, tech earnings and late week US data releases the key indicators to watch
• Nikkei 225 futures bounce from 50DMA, generating long setup

NZD hit by RBNZ dovish pivot, China growth concerns

NZD/USD looks horrible on the charts, weighed down by the RBNZ’s dovish pivot nearly two weeks ago and, more recently, renewed concerns towards the outlook for the Chinese economy.

You can see that in the chart below tracking the rolling 10-day correlation between NZD/USD with USD/CNH in grey, two-year yield spreads between New Zealand and United States in red, copper futures in orange and WTI crude oil futures in blue.

The relationship has either been highly correlated or strongly negatively correlated when it comes to USD/CNH, underlining that relative interest rate differentials and global growth concerns, especially towards the world’s largest commodity consumer, China, have been influencing NZD/USD over the past fortnight.

NZD/USD hits fresh multi-month lows

Technicals have also been a feature for the Kiwi-dollar cross recently, rejected at downtrend resistance on multiple occasions in early July before losses accelerated last week as support at .6050 gave way. The subsequent downside flush has seen NZD/USD take out another minor support level at .5985 to start the trading week, providing an opportunity to establish positions depending on how the near-term price action evolves.

NZD/USD trade setups

Momentum is entirely with the downside with RSI in a clear downtrend while MACD continues to generate a bearish signal. Should we see a retest and failure at .5985 at some point on Tuesday, consider initiating shorts with a tight stop above .5985 for protection. There’s not a lot of visible downside support evident until you get back below .5880.

Alternatively, should NZD/USD break back above and hold .5985, consider establishing longs with a tight stop below the level for protection. The initial target would be .6050.

Managing event risk

With next to nothing on the New Zealand calendar this week, risk events will be dominated by those abroad. In the States, the advanced Q4 GDP report and initial jobless claims data on Thursday will be important, as will the Fed’s preferred underlying inflation measure, the core PCE deflator, on Friday. Tech earnings from Tesla and Alphabet on Tuesday also carry the potential to shift risk appetite.

As covered on Monday, if you’re trading Asian currencies right now, it’s important you keep a close eye on the offshore traded Chinese yuan against the US dollar.

Nikkei 225 futures bounce ahead of US tech earnings

Nikkei 225 futures bounced strongly from the 50-day moving average on Monday evening, mirroring the reversal in US equities during the session. With horizontal support located nearby at 39455, it provides a decent long setup, allowing for a stop to be placed below for protection targeting a push back towards the record highs struck earlier this month. While it would have been nice to have seen the overnight candle print as a bullish engulfing, there is still time during Tuesday’s day session to generate a bullish signal.

Adding to the case to consider longs, the downtrend in RSI has been broken, signaling a possible easing in bearish price momentum. MACD is yet to confirm to the signal, underlying the need to focus on position sizing and capital protection. Earlier in July, the price did a lot of work either side of 41000, making that a potential trade target. Beyond, 41600 and the record high of 42500 will be in focus.

Should the trade work in your favour, consider using a trailing stop or raising your stop to entry level to provide a free hit on upside.

As for obvious risks to consider, intervention from the BOJ to strengthen the Japanese yen would have negative implications for exporter earnings, creating downside risks for the Nikkei. However, with key inflation and GDP data arriving later in the week, such a move appears unlikely near-term. Tech earnings from Alphabet and Tesla after market close on Tuesday will also be important, likely flowing through to the performance of Japanese equities on Wednesday.

-- Written by David Scutt

Follow David on Twitter @scutty