New Zealand Dollar Boosted by Low Volatility; What’s Next for NZD/USD, AUD/NZD, EUR/NZD?

New Zealand Dollar Vs US Dollar, Australian Dollar, Euro – Outlook:

• NZD/USD has been supported by an improvement in risk appetite recently.
• EUR/NZD rally looks tired.
• Does the AUD/NZD rally have legs from a medium-term perspective?

The suspension of the US debt ceiling, the resilience of the global economy, and hopes that US interest rates are peaking have boosted risk-sensitive currencies, including the New Zealand dollar.

Volatility across asset classes has fallen over the past two weeks, with equity market volatility, as measured by the CBOE VIX index, down to the lowest level since the Covid selloff in 2020. Currency volatility, as measured by CVIX, is at the lowest level in more than a year (see chart).

Volatility indicators

Source Data: Bloomberg; Chart created in Microsoft Excel.

The improvement in risk sentiment has pushed up NZD/USD by over 1% since the start of the month. The NZD fell sharply late last month after the Reserve Bank of New Zealand (RBNZ) hiked interest rates by 25 basis points, but acknowledged that rates are at a peak. For more details see “New Zealand Dollar Slides as RBNZ Hikes By 25 Basis Points, But Sees Peak in Rates”, published May 24.

NZD/USD: Holds above key support

On technical charts, NZD/USD has managed to so far hold above vital converged support on the lower edge of a declining channel from February and a 50% retracement of the October 2022-February 2023 rise. For more discussion, see “New Zealand Dollar’s Slide Approaches Limits: NZD/USD, EUR/NZD, GBP/NZD Price Setups”, published June 1.

NZD/USD Daily Chart

Chart Created Using TradingView

While the hold above support is encouraging for bulls, it doesn’t mean that the worst is over – at minimum, NZD/USD would need to break above the 200-day moving average (now at about 0.6150) for the immediate downward pressure to ease. A stronger signal would be a cross above the May high of 0.6385 for the bearishness to reverse.

NZD/USD Monthly Chart

Chart Created Using TradingView

Interestingly, on the monthly chart, the 14-month Relative Strength Index appears to be turning up from near the crucial 40-mark, which has been associated with rebounds in the pair in the past. On the downside, any break above the lower edge of the bearish channel would accentuate downside risks.

AUD/NZD Monthly Chart

Chart Created Using TradingView

AUD/NZD: Time for a breather?

After a spectacular rebound, AUD/NZD could be due for a short breather as it nears a tough ceiling at the February high of 1.1085. But two important developments on the higher timeframe charts indicate the rally this month could have some legs. Firstly, the rise in 2022 above the 2020 high of 1.1040 is a sign that the multi-month downward pressure is fading. Secondly, on monthly charts, the cross has managed to find support on the resistance-turned-support on the 89-month moving average. Any break above 1.1085 is needed for the medium-term outlook to turn constructive.

EUR/NZD Daily Chart

Chart Created Using TradingView

EUR/NZD: Rally over for now?

EUR/NZD’s rebound this month has lacked strength, just as the cross approaches a stiff hurdle at the early-May high of 1.7835. Chances are that EUR/NZD could settle in a 1.7150-1.7850 range in the near term. This follows a retreat in April from the top of a rising channel since 2015. Any break above immediate support at Tuesday’s low of 1.7570 would raise the odds of the range view.

— Written by Manish Jaradi, Strategist for DailyFX.com

— Contact and follow Jaradi on Twitter: @JaradiManish