In a perfect world for the New Zealand dollar, the Fed would have paused hiking in December and China's covid reopening would be going smoothly.
Instead, the Fed has dug in its heels and wants a fight with the market over the path of rates. In China, the reopening has come more quickly than almost anyone hoped for but the aggressive path has the market worried about intense short-term pain.
A few weeks ago it looked like the perfect scenario for the kiwi but the problem is that the path for inflation is uncertain and the Fed doesn't want to take any chances. That's led to four straight days of selling in NZD/USD and what looks like a short-term (at least) top.
So where is it headed?
The 38.2% retracement is a good place to start at 0.6133 with 0.6000 close to the 50% as a possibility.
How deep it falls depends on how long it takes the Fed to indicate that rates might not need to rise as much or stay as high. Alternatively, the entire rally since October could fall apart if inflation stays high and the Fed continues to dig in.
Zooming out, if the Fed pivots and the dollar falls, there's a major potential double bottom in play and and inverted head-and-shoulders, pointing to 0.7400.
Ultimately, I think this is a tradeable pair in 2023 and that we're likely to see some big swings. For now though, I don't see any reason to fight the downdraft.