New Zealand Dollar extends losses below 0.5850 as Oil prices approach the $100 level
- NZDUSD extends decline below the 200-day SMA to test four-week lows at 0.5835.
- Risk aversion is hurting the Kiwi, as the Middle East conflict widens and Oil prices rally.
- The technical picture shows a bearish trend with price action nearing the neckline of a bearish H&S pattern.
The New Zealand Dollar trades lower against the US Dollar (USD) for the third consecutive day on Wednesday, extending losses below 0.5850 to test four-week lows at the 0.5835 area. A dismal market mood as the Middle East conflict widens and higher Oil prices rally is hurting confidence in the risk-sensitive Kiwi, while a soft US Dollar keeps the pair from depreciating further.
Investors’ appetite for risk plummeted on Wednesday as reports of a new round of reciprocal attacks between the US and Iran push back hopes of a swift end to the conflict. Beyond that, Tehran-backed Houthi militias entered the stage on Tuesday, with attacks on Saudi Arabian Oilfields, further entangling a conflict which threatens to slide into a regional war.
Oil prices undermine support for the NZD
Oil prices have rallied further in this context, with Brent Crude reaching session highs above $99.00, drawing closer to the feared $100 level, and increasing the exposure of New Zealand's oil-importing economy.
Earlier on Wednesday, data released by the National Bureau of Statistics of China revealed that consumer inflation grew 0.4% in August, after a 0.1% contraction in July, beating expectations of a 0.3% increase. Year-over-year (Y-o-Y), the Consumer Price Index (CPI) accelerated to 0.8% from 0.5% in the previous month. These figures eased concerns about a patchy recovery in China’s domestic demand and provided a moderate impulse to the NZD during the Asian and early European sessions.
US Dollar rallies, on the other hand, remain subdued so far, with investors awaiting the release of US Consumer Price Index data, due on Friday, to confirm expectations of a Federal Reserve (Fed) rate hike next week. Brown Brothers Harriman’s Elias Haddad, however, argues that “even if a September Fed hike becomes a done deal, we doubt USD will make new cyclical highs,” as tightening by other major central banks “limits policy divergence, with the ECB widely expected to deliver a 25bps hike tomorrow,” reducing the scope for further sustained Dollar appreciation.
Technical Analysis: NZD/USD approaches the neckline of a dovish H&S formation
NZD/USD trades below its 200-day simple moving average (SMA), keeping a bearish near-term bias in place as price action approaches the neckline of a bearish Head & Shoulders (H&S) formation, in the 0.5800 area. Momentum indicators in the daily chart endorse the bearish view, as the Relative Strength Index (RSI) dips below 50 and the Moving Average Convergence Divergence (MACD) steadies at negative levels.
A confirmation below 0.5800 would increase pressure towards the late July lows, near 0.5765 and the July 13 low, at 0.5745. The H&S's measured target is below the June 26 low at 0.5626. Bulls, on the other hand, should push the pair above the mentioned 200-day SMA, in the 0.5855 area, to shift the focus towards Friday's high, near 0.5900, and the late August highs, in the 0.5990 area.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.