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As we come into the RBNZ Meeting on interest rates the market is heavily long and we expect the NZD to break lower as speculators get taken out the market on stop – Our view of the fundamentals, sentiment and technical levels are below.

RBNZ to Hold Policy

The RBNZ announces its monetary policy on Wednesday 10 July, and we expect rates to be held at current levels of 5.50% which is also the consensus market expectation.

RBNZ Forward Guidance

The May minutes show that the RBNZ discussed the possibility of raising rates but concluded that: “while the near-term balance of risks around inflation are skewed to the upside, there is more confidence that inflation will decline to within the target range over the medium term.” (RBNZ)

We’ll be looking at whether that statement is changed in July which we think it will – If we get any hint that rates have peaked or that the RBNZ is more optimistic on inflation coming down we expect to see the NZD break lower and hit speculators on stop – the good news is in terms of the interest rate outlook and also in terms of risk sentiment which has supported the Kiwi.

Risk Sentiment

In terms of risk sentiment it won't get any better for the Kiwi and a major factor is China – the market is bullish on China but recent economic data does not point to a big economic rebound.

China: The growth engine of the global economy and traders have also become increasingly optimistic that additional China stimulus could be introduced at the Third Plenum meeting in mid-July and as we come into the meeting investor optimism is high.

The third plenum has big historical significance and has previously been the start of transformative periods of China’s economic policy.

For example, China under the leadership of Deng Xiaoping in 1978, announced it would accelerate economic reform and open up its economy to private and foreign capital. 

This time, the meeting is happening much later than expected. It is normally held in the fall following the twice a decade selection of new party leaders the prior year and below is an opinion we agree with...

“Most analysts believe the long delay suggests the lack of a consensus over how to address weak domestic demand, a rapidly contracting property sector, worsening trade conflict, and soaring debt. My best guess is that the Third Plenum will propose measures to address the housing market, the restructuring or re-profiling of local government debt, and weak household consumption. Given the depth of the problems and their intractability — the only way these can be resolved quickly without damaging other parts of the economy is with one-off increases in government debt,” he said, adding: “I don’t think we should be very optimistic about any proposed measures that come out of next month’s meeting.”

(Michael Pettis, a professor of finance at Peking University’s Guanghua School of Management.)

China has huge problems after decades of excess and there are no quick fixes - the idea that China can somehow overcome its problems is missplaced optimism in our view - A slowing China is bad news for commodity prices, commodity currencies, and risk sentiment.

Also, the Kiwi will be sensitive to a Trump election victory and any breakdown in stocks which are at a bullish extreme.

Sentiment

If we look on the chart below speculators have generally been wrong about trend changes. At the same time, smart money commercial hedgers have been correct – we now have a big divergence and between the two groups with the commercials favoring the short side and we think they are right the NZD will top out and move lower.

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Technical Analysis

In terms of our view of the key technical levels of support and resistance there outlined below.

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