NZD SHOULD UNDERPERFORM - The economic calendar is rather light this week and I believe the technicals will play more of an influence in direction, or lack thereof. That said, the biggest economic events this week are UK employment, the RBNZ rate decision and Aussie employment. Given the significance of central bank policy these days, the RBNZ rate decision (early Thursday) will be the most important event to watch. I have been calling for a period of relative underperformance in the New Zealand Dollar, and believe we will see a more dovish than expected RBNZ this week. While the consensus is for a rate hike of 25 bps, perhaps this rate hike will also bring a more cautious tone going forward and one that firmly suggests Mr. Wheeler and co. are happy to remain on hold for a bit. In a world where other central banks are moving in the opposite direction, I think it would be foolish for the RBNZ to be moving too aggressively with its tightening bias, especially in light of a local currency that is still well overvalued on a historical basis.
KEY MARKETS TO WATCH - Moving on, here are some of the key markets I am watching at the moment. US equities have yet again posted fresh record highs, and with technical studies stretched across the board, I am waiting for a significant short-term pullback at a minimum. The key level to watch below is SPX 1915. Look for a break of this level to suggest an interim top is in place. The Euro is still consolidating, but the consolidation is a bearish one, and it looks like the major pair could be getting ready for the next downside extension towards the yearly low just under 1.3500. Elsewhere, USD/JPY is rolling back over after stalling at key multi-week internal range resistance, and a break back below 102.00 would open the door for another round of weakness, once again exposing 100.75. I am also watching emerging market FX as a basket, and looking to see if the group will start to show signs of weakness.
AN INTERESTING FORMATION - On the commodity front, crude oil has been very well bid of late and looks like it could make a fresh break to the upside. A sustained rally over $105.00 will open a possible run towards $108.00. Finally, GOLD remains quite interesting following the latest breakdown. While at this point it looks like the focus is on the downside and for further weakness back to the multi-month $1180 area lows, it is also worth pointing out the possibility of the formation of a major inverse head & shoulders pattern on the weekly chart. Should the market stay supported above $1200 and then break back over $1300, it would expose the neckline around $1400 and get people talking about a measured move upside extension back into the $1600 area. This is not something that will play out over the next few days, but is worth considering over the medium-term.