The NZD/USD pair went back and forth during the session on Thursday, but ultimately sold off. In the end, we are simply bouncing around just above the 0.77 handle, an area that has been very supportive. However, this makes sense as the New Zealand dollar is so heavily correlated to the commodity markets, which is correlated to the Federal Reserve and whether or not quantitative easing is going to be cut back, or even end.
To think that the Federal Reserve is going to end quantitative easing is probably a bit aggressive, but there is a lot of talk about them cutting back in the month of September. If they do, you can expect the US dollar to gain value against almost all currencies, and it will be especially obvious against the commodity currencies like this one. If they do decide to cut back on quantitative easing, I fully expect to see 0.75, and probably much lower by the time that move is all said and done.
But, there is the possibility that they do not cut quantitative easing at all. If they don't, this pair will skyrocket and as a result I think this will be one of the best trades in the late part of 2013. In the meantime, I think the markets are simply playing it safe as well as being very illiquid because most large traders are away. I think we are roughly 2 weeks away from the move, and until then this pair will probably do very little in the way of movement.
There are possible catalysts between here and there, such as comments out of Federal Reserve member’s mouths, which of course we get from time to time. They don't necessarily make their intentions clear all of the time, so expect a lot of choppy action between now and then. Don't be surprised if a sudden move in one direction gets turned around and completely negated. There could be a lot of headaches over the next couple of weeks, but eventually we will get this market moving in the clear direction.
