New Zealand has experienced an extended period of decline with the global demand of milk products diminishing drastically. The events of China have acted as a catalyst which has reimbursed the bearish sentiment most market participants had on this commodity currency. With the previous rate cut back in July and the RBNZ suggesting that the NZD is still trading above its intrinsic value, there seems to be some space left for the NZDUSD to trade lower. Taking a look at the charts, this pair has declined in a steady fashion since May 2015 with a current accumulation of over one thousand pips.
There has been a constant influx of negative news releases from the New Zealand economy, the BNZ-Business performance index which was released declined to 53.5 compared to the previous month’s figures of 55.1. It looks like the devaluation of the New Zealand dollar which was meant to amount to the increase of values of sales in the foreign exchange market, had no impact on the domestic business performance. The global diminishing prices of milk have still hit domestic business in New Zealand regardless of the manufacturing sectors activity growing for 34 months in concession. Earlier this week governor Graeme Wheelers speech explicitly warned market participants about the NZD being overvalued with a further cut in the official cash rate in the coming months.
With the NZD fundamentally bearish and the USD bullish, the question is how much further can the NZDUSD trade down? It becomes a question of whether all the bearish momentum has been priced in with a potential bottom at 0.6500 or this being another event where the fundamentals and technical have been lagged with a potential decline in Q3. The 0.7500 support created in July was caused by the second quarter CPI report. Results showed an increase of 0.4% in the quarter and an annual gain of 0.3%. In a period of constant bad news, the little good news can be over inflated and this may have simply been the case in this scenario.
Record shorts for the NZDUSD still stand around 1.3bn CTFC positions as of mid-July. Market participants still remain bearish on the NZDUSD simply because of the obvious eventuality of a monetary easing within New Zealand. In July, the RBNZ reduced the benchmark overnight cash rate by 25 basis point, taking key rates to 3.00%. With consumer price index rising 0.3% y/y in the second quarter in New Zealand, inflationary pressure still remains very weak and because of this another 25 bps shave may be expected in the next monetary policy meeting in September.
The attributes which put pressure on the New Zealand economy and NZDUSD are overwhelming. This is a heavily bearish market which is balancing on a very thin line. In a technical perspective, the current conditions do look somewhat oversold but the fundamentals all suggest that this may just be the start of something greater. The potential of a divergence in monetary policies within the RBNZ and FED make this an excellent strong weak pair to trade, but the slowdown in China and loss of appetite for milk has put the NZDUSD in the spotlight once more. Most traders will be looking for a potential move below the strong 0.6500 support.
The technical and fundamentals marry in this scenario. Fundamentally the potential interest rate cut by the RBNZ and events in China have weakened the NZD drastically against its counterparts. Technically on the daily timeframe the attributes of a downtrend holds. We have lower lows and lower highs with prices not trading above prior highs. The MACD trades to the downside in addition to prices trading below the 20 SMA. Price action suggests a wedge formation in play with support based at 0.6500 and resistance just above 0.6650. The 0.6500 still remains as the key level which will suggest the continuation of this bearish trend which has been in motion since May.
AUDNZD is a pair in which there is a battle of who is weaker. The falling prices of Gold have weakened the AUD drastically. Prices have been in a period of consolidation since July. The range is very wide but a light support can be seen at the 1.1100 level. A breakdown below this point may open a gate to 1.1000. Technical indicators such as the MACD show prices are flat but as of now the move below both the monthly pivot of 11269 and 20 SMA, act as early signals for a pending break below the 1.000 supportive level.
There exists a range within this pair with support at 81.00 and resistance at 82.50. This is a typical breakout/down strategy. The MACD trades to the upside and prices currently trade marginally above both the monthly pivot and 20 SMA. Fundamentally the NZD is weak but technically this pair may be in store for a minor correction before bears take control once more. The correction may be activated once prices breach the 83.00 level.
NZDCAD is another pair currently ranging due to the weakness of both single currencies. Whilst New Zealand faces its issues with the diminishing demand of milk, Canada battles the falling price of Oil. Technically once prices attain a daily close above the resistance at 0.8700 then the next major level will be 0.8830. Things look more in favour of the bulls as some support may be found below the weekly and monthly pivotal regions. A move back below 0.8550 invalidates this daily bullish outlook.
With the CHF acting as the passive counterpart, the NZDCHF is currently bearish both fundamentally and technically. Prices trade below both the weekly pivot and 20 SMA. Today may be when the MACD crosses to the downside adding to the attributes which confirm to us that the NZDCHF is getting ready to trade lower. A breach of 0.6350 would fully confirm the bearish view on this pair with potential targets stretching as far as the 0.6200 regions. A move back above 0.6500 invalidates this daily bearish view.
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