The New Zealand and Australian dollars continue to trade in a range amid strong uncertainty. Oil and industrial metals prices continue to rise, which is a bullish factor for commodity currencies, but the main events of the summer will take place on June 16, and the expectation of the results leads to the fact that risky assets are under pressure, even despite the rise in commodity prices.
On June 16, there will be a Biden-Putin meeting, which can both relieve tension and will affect the growth in demand for risky assets, and, on the contrary, lead to a sharp increase in demand for the US dollar. On the evening of the same day, the Fed will hold a key meeting of the summer, at which, the question of starting to reduce the QE program will most likely be raised.
The expectations of these events determine market tension and low volatility.
The New Zealand dollar is likely to go into a correction, but it is unlikely to be deep. There is a week left before the FOMC meeting, and traditionally, such tense periods are pending. The volatility is low, but the US dollar is trying to slightly strengthen, as traders are preparing for surprises, which can only be hawkish in the current conditions.
Nevertheless, the New Zealand dollar maintains its positions in the range even under pressure, and the reason for this is the positive assessment of the economic outlook. New Zealand is emerging from COVID-19 constraints ahead of most countries, along with a strong labor market recovery. The economic activity has rebounded so quickly that capacity shortages are already reported. Inflationary pressures look stable, and forecasts are improving accordingly.
ANZ Bank has published updated quarterly forecasts. An increase in the rate to 0.75% is forecasted for 2022, while the NZD/USD rate will rise to 0.77 by the end of this year.
ANZ sees two factors as the key to success. Firstly, the coronavirus cases were kept at low levels, which made it possible to quickly restart the economy, and secondly, the labor market significantly fell lower than in the US due to a targeted government policy, which allowed us to keep effective demand at a high level.
The market is now convinced that the RBNZ will start the rate hike cycle well ahead of the Fed, which will give a strong bullish momentum to the NZD.
Over the reporting week, New Zealand's net long position declined by 190 million to 430 million. The movement is small, and the advantage for the NZD is still preserved. However, the target price went below the long-term average, which increases the chances of a downward correction.
The nearest target is 0.7145/60, a daily close below this zone could lead to a test of the recent low of 0.7120. There are no reasons for a stronger movement yet.
Despite the fact that the NAB bank's business confidence index fell from 23p to 20p in May, the survey results suggest that the Australian economy is recovering at a very high rate. Business conditions hit records for the second month in a row, with orders, employment, and company profits at record levels. NAB suggests that the strong growth this year is more than just a recovery from the pandemic, as there is a marked increase in investment in key sectors of the economy.
The Australian dollar is likely to trade in a range with a downward trend before the FOMC meeting. No major releases of their own are expected in the coming days, as Friday is a holiday. There will be a possible reaction to the publication of China's May inflation data on Wednesday morning, but this reaction is likely not to lead to an exit from the range.
The net short position on AUD slightly rose during the reporting week, namely to -167 million. The advantage is more symbolic and does not give reasons to build long-term forecasts. The estimated price is slightly below the long-term average, but there is no tendency to further decline.
The most likely scenario for the Australian dollar is trading in a range with a slight downward trend. The nearest support zone is 0.7530/60, then 0.7520. It is possible to reach this level (23.6% of the growth in 2020/21 and at the same time the previous high from September 2020) only in the case of a sharp demand for the US dollar, which may occur on June 16.