NZD/USD: riding the coattails on the CNH and Aussie - NZ GDP to cap at key trend-line resistance?

• NZD/USD: perched at a critical trend line resistance level.
• NZD/USD: driven higher on CNH strength, dollar weakness, Aussie bulls eyeing 0.73 the figure fibo retracement level.
• NZ GDP data: "The NZD would get a larger reaction to a top-side surprise".

The NZD dollar has once again been riding the coattails of the Aussie that trades as a proxy to what goes down in China town.

The latest there is that USD/CNH dropped from 6.8703 to 6.8424, (albeit still well above the levels that some analysts in the banks had been calling for not as far back as before August's business), on the back of remarks from the Chinese Premier who said a yuan devaluation would “do more harm than good”. 

The comments have come into play after the central bank revived a “counter-cyclical factor” in its daily fixing to support the currency back in late August, halting a record 10-week slide when the CNH was up in the 6.30's vs the greenback that rattled global markets and irritated Washington - So keeping things in perspective - USD/CNH still has a long way to fall back to before any Aussie bulls should be getting too excited. We have the FOMC around the corner and while there are arguments for and against a higher greenback - the fact of the matter is - the US economy is running at full steam and China is not.

Chinese Premier Li Keqiang, who made the market moving comments over the Yuan yesterday, speaking at the opening plenary of a World Economic Forum conference in Tianjin, also said "China is confronted with a host of challenges...We're facing greater difficulties in keeping the stable performance of the Chinese economy." He was also claiming that the recent slide of the yuan against the U.S. dollar was not an intentional policy decision from Beijing.

Either way, what might anchor the CNH's advance apart from the divergence between the US economy and stock market performances let along rate rises from the Fed could well be when the market considers the negative ramifications for the Chinese economy when the trade war escalates to the point of no return. However, markets are markets and for now, the antipodeans are riding the dollar's weakness all the way in.

AUD/USD is headed for a test of the 76.4% fib retracement of the slide from 0.7381 to 0.7079 at 0.73 the figure, currently closing a very bullish daily stick at 0.7268 having made an overnight high of 0.7275. The kiwi is perched on top of the 21-D SMA which is the make or break level when considering the Bollinger bands and key resistance level of the downtrend that commenced mid-April earlier this year up at 0.7393.

NZ GDP data: "The NZD would get a larger reaction to a top-side surprise"

For the day ahead, we have the 'dated' NZ GDP data as the main event for Asia. Analysts at ANZ offered a full preview as follows:

"As always, the GDP data is dated, relating to activity in the April, May and June while we are approaching the end of Q3. - Nonetheless, the data matters for the market because it determines the starting point for the Reserve Bank’s estimate of the ‘output gap’ (spare capacity in the economy) and thus the medium-term track for inflation. 

In its August Monetary Policy Statement, the RBNZ sounded less than confident about getting core inflation sustainably up to the target midpoint in an acceptable timeframe, so any GDP disappointment would likely be seized upon by a market that is already pricing roughly 40% odds of an OCR cut in the next 12 months. 

On the other side, a number approaching 1% might see the priced odds of cuts reduced – depending on how important temporary factors are proven to have been. In our view, they will have been key: a weather-related recovery in milk production, livestock slaughtering boosted by M. Bovis, and recent strong population growth-boosting services. Even with these factors, on our forecast (with no revisions) implied per capita GDP growth would be just 0.5% y/y. - given the way markets are trading, it looks like the NZD would get a larger reaction to a top-side surprise."

NZD/USD levels

Support located at 0.6540 and resistance is located at 0.6640. The 21-D SMA anchors for now at 0.6608, (0.6622 was the recent high), but a break taway here opens 0.6685 1st July lows. However, 0.6711 would be the 76.4% retracement of the daily downtrend from 0.7393. The next target would be the 61.8% retracement target of the same sell-off at 0.6841 (this falls in line with the lows of 15th May). A continuation of the downside and break of 0.6500 would open up 0.6344 and 0.6306 on the wide.