NZD/USD bears step in and heavy daily candle expected to contain the bulls

• NZD/USD bulls taking profits ahead of the weekend.
• The correction is strong and could keep the kiwi down for days to come ahead of next major data release.
• RBNZ is price sin for a 25bp hike, risk is if bank does more. 

NZD/USD is trading around -6% lower on the day after falling in a short correction from a high of 0.7218 to a low of 0.7140. The US dollar is little changed but US yields have moved higher again in the bullish cycle and from a technical perspective, there could be more upside to follow shortly.

Meanwhile, the focus has been on the inflation for New Zealand with the Q3 CPI inflation data arriving at a much faster than expected 4.9% YoY has been the trigger for the latest spate of fears around RBNZ policy. As it is, the money market is fully priced for a 25 bps move before the end of this year and partly priced for a more significant amount of tightening. The market is assuming that a 25 bps rate hike is a done deal. 

''This implies that the key element for markets in the coming weeks surrounds the risk of a larger move,'' analysts at Rabobank argued. ''The release of New Zealand’s Q3 labour data on November 2 will be watched closely in particular for any signs of a pick-up in wage inflation.  Also key in the coming weeks will be the decision by the government regarding the loosening of lockdown restrictions in Auckland.''

US yields in focus

Meanwhile, market-implied expectations for US inflation for the next five years have surged to the highest in 15 years as measured by breakevens, Bloomberg reported. 

US yields on Thursday have indeed moved higher on Thursday with the 10-year printing a fresh 1.682% high on the approach to the March highs of 1.774% from a technical perspective:

From a daily perspective, there are prospects of a move beyond the daily highs towards a -272% Fibonacci retracement of the current daily flag's range:

Looking forward, analysts at ANZ Bank still think the NZD will benefit from higher interest rates, affirming both carry and confidence in the Reserve Bank of New Zealand’s inflation credentials. ''Amid rising global inflation, it’s logical that the NZD should strengthen, softening the blow,'' the analysts added. 

NZD/USD technical analysis

''The Kiwi is about 3/4 of a cent off yesterday’s peak, having experienced the biggest correction since the current rally started just over a week ago,'' analysts at ANZ Bank explained.''

''At this stage, it looks more like a rebalancing rather than the start of a fresh downtrend.''

The price is meeting an area of strong support and high volumes there and below which could equate to a move to the upside if it holds. However, the corrective candle is very strong so the momentum could give the price pinged to the floor especially as the weekend approaches. 

If the support breaks, the price could easily move through the volumes to reach at least 38.2% Fibonacci retracement of the bullish impulse. This will be the last defence for the 50% mean reversion target.