NZDUSD Weaker as China Moves to Tighten Hold on Hong Kong, Shrugs of Positive Retail Sales

Summary:
• NZDUSD is trading lower today despite positive New Zealand retail sales as China imposes stricter security on Hong Kong, sparking risk aversion.

NZDUSD is one of the biggest losers among the major currencies in today’s trading as China’s move to tighten its hold in Hong Kong sparked risk aversion. The currency pair is down by 0.35% as it trades around 0.6100, falling from its intraday high at 0.6128 despite positive New Zealand retail sales.

China’s National People’s Congress (NPC) announced that it plans to put in place “an enforcement mechanism for ensuring national security in Hong Kong.” A draft of the proposal was later obtained by Xinhua which showed that China aims to enact forceful measures to maintain security and national sovereignty. This sparked risk aversion because US President Donald Trump threatened to “react strongly” if China were to pass tighter security laws on Hong Kong.

Consequently, NZDUSD fell because risk aversion triggered a flight to safety to the US dollar.

Any bullishness that may have been caused by the positive New Zealand retail sales report for Q1 2020 was then ignored. It showed that consumer spending for the quarter fell by 0.7% which was less than the 1.5% decline that analysts had predicted.

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NZDUSD Outlook

On the 4-hour time frame, it can be seen that NZDUSD has gotten rejected at its previous highs. The area around 0.6155 is where the currency pair peaked on April 30 and May 8 too. Each time the market hit that price, NZDUSD went down. Does this mean that NZDUSD is on its way to trade lower?

Technicals on the 1-hour chart suggests so. A closer look at the recent price action would reveal that the currency pair has made lower highs after a series of higher highs. Consequently, a head and shoulders pattern has formed. As of this writing, NZDUSD is testing the neckline support around 0.6110. A convincing break below this level is needed in order for the head and shoulders pattern to be validated. Should this happen, NZDUSD could drop to 0.6047 where it may test the 200 SMA for support. If there is enough bearish momentum, we could even see NZDUSD drop to 0.5925 where NZDUSD bottomed on May 18.