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Dovish Banks Could Crash These Currencies

May 25, 2023
Frank Cabibi

Considerably dovish news from central banks in the US and New Zealand has caused a major stir in the markets. Governor Orr and Vice Chairman Powell both released some reassuring news for the economy in the long term. But what does this mean for USD and NZD?

EdgeFinder Analysis

GBPNZD is a pair that should be on your radar now. The EdgeFinder still scores at a neutral rating of +2, but sentiment could continue to lean more towards a buy (+3 or higher). The kiwi carries one of the highest rates in the market right now, but that could be subject to change.

Governor Orr spoke on monetary policy going forward and mentioned that he sees no need for another rate hike after this 25 bp move. The rate sits at 5.5% and will likely stay there until the RBNZ decides to cut. Meanwhile, countries like UK which suffers from high levels of inflation has a different plan: continue the hikes as needed to reach their target of 2%.

After Jerome Powell spoke yesterday, the dollar saw a spike in bullishness although the statement was very much a mixed one. Although he considered inflation to be "unacceptably high", the need for more hikes has become very muddy.

It appears that Fed officials are split between a continuation or a pause for next month, but the overall sentiment reads lesser confidence in a need for one. The DXY is up with bond yields today, however price is testing a key resistance level on a long term trend line. Today's price action could determine whether or not the pair has completed its move or not.

Kiwi pairs are starting to see a heavy bearish bias from the EdgeFinder after that recent dovish RBNZ news. NZDCHF is one of the strongest sells of the kiwi crosses, however, it is likely that more will start to turn increasingly bearish over time.

We should pay attention to COT and retail. Right now, there's a heavy long bias from the crowd and a mixed reading from smart money. However, we can check COT over time to see where they might be shifting their interest. Both the trend and seasonality are forecasted lower for the month of June, which suggests further downside for the pair.

Retail Spotlight

After taking a look at retail, it's evident that the reversal traders are heavily against the strong moves from kiwi. Although there might be some temporary profitability, it could be limited as smart money will likely be dumping what they have in NZD.

Smart Money Spotlight

Here is smart money getting less and less bullish over time. The bulls are fading on kiwi, and as we approached this week's news, sentiment fell. Based on historical data, we can expect a lower bias going into next week. If that yellow bar on the Currency Pair Bias chart shows up below 0%, that means investors are leaning towards CHF bullishness.

Fundamental Spotlight

When stacked among the rest, USD and NZD are the strongest in terms of funds rates. however, we still need to consider what is to come for the two hawkish currencies. After interpreting the two statement from this week, we can conclude that both the US and New Zealand are near or at the end of their rate hike journey. Investors are now expecting a pause or a cut, but hardly anyone thinks there will be another rise from the Fed or RBNZ.

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