NZD/USD: Bears lining up for an attack of the 78.6% Fibo

• The upside for the kiwi remained capped last as US-China trade talks ended without an agreement and the weekend's escalation of the trade spat as knocked the bird off its perch.
• NZD/USD is currently trading at 0.6569, lower within a range of between 0.6604 and 0.6564. 

Trump’s tweets on new China tariffs hurt the Kiwi at the start of the week, where most of the damage was done by Asian and late London markets just as NY came online. Traders have been selling into rallies, (fading) a theme that is likely to remain all the while uncertainty prevails and investors price out an imminent trade deal between the U.S. and China. 

China's top negotiator Vice Premier Liu He said on Friday: 'If the US raises tariffs, we will react. Of course, we hope that the US maintains restraint, and China will also restrain itself, and not escalate it indefinitely'; This indicates China will be careful not to overreact but will give a measured response and we are awaiting announcements from the Chinese, expecting more tariffs on U.S. exports and perhaps a weakening on the CNY through higher USD/CNY fixing by PBoC. 

The Chinese responses are to be expected and should not come as a big surprise to markets so we may not see any tremendous swings. However, the current trends, such as weaker stocks, commodity-FX, EM-FX and higher priced safe havens, are likely to be sustained which is bearish for the Kiwi considering the prospects for a prolonged trade negotiation between the U.S. and China. Just today, Trump tweeted that China had a great deal and backed out and on the Chinese side, their view is that there was no acceptable deal and that China will not 'back down on matters of principle'.

When might trade talks start-up again?

Meanwhile, Kudlow suggested that Trump and Xi could meet at the G20 at the end of next month, although that is still some way off. Kudlow also said that China has invited Mnuchin and Lighthizer to Beijing for further talks. Either way, there doesn't seem to be a quick solution in sight, and markets have adjusted positions to reflect that conclusion.

"It is difficult to see how the differences can be ironed out in the short term, and we see a risk that it will take financial stress to force the two sides back to the negotiating table to find a solution,"

analysts at Danske Bank argued. 

Looking ahead

We are light on domestic data, and U.S. data is second tier in the main, bar retail sales. Eyes will look to Aussie jobs and Fed talk. However, we could still get some price action with respect to trade headlines,  either from the US administration or China. The U.S. is expected to give details of tariffs on a further $325bn of Chinese exports. China has promised retaliation that could come in the form of extra tariff announcements on US exports in the next couple of days and CNY fixing. 

NZD/USD levels

The bird had been supported following the RBNZ spike lower that left positive divergence on the charts. However, the law of gravity is against the bulls again with the price capped at a key confluence resistance level made up of the 50% retracement of 30th April swing highs and recent RBNZ swing lows, being the late March trendline resistance as well as prior support. Daily Stochastics are also neutralising. Today's bearish stick is engulfing last week's 9th May stick and bears eye the 6526 aforementioned low on a break of the 78.6% Fibo of the aforementioned range, at 6561 (the session's low, so far, is at 6564). On the upside, with the shorter term stochastics in the red and lower ATR, a pullback to 6580 would be a 50% mean reversion of the day's range so far.