Will the NZDUSD Bears lose Steam?

Will the NZDUSD Bears lose Steam?

By: Darryl Frankfort | Where To Trade | On:30-09-2014 15:03
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Key Highlights

  • Reduced economic growth causing bearish sentiment
  • Kiwi falls even after Rate hike
  • Rate hike will not ease the selloff of the NZD
  • Lower commodity prices not fully reflected in the exchange rates
  • RBNZ happy to see the lower exchange rates
  • Unjustified and unsustainable levels, RBNZ considered intervention

 

The Kiwi has shed off over a thousand pips since its 0.882 peak in July to the lows of 0.776 at yesterdays close when paired against the US dollar. Last week, the NZDJPY fell over 2800 pips to close the week at 85.9 from the highs of 88.8. The Kiwi has been selling across the board since the September quarterly GDP report was released.

In the September Q3, 2014 the RBNZ reported a 0.7% GDP growth rate down from 1.0% GDP growth in both the March and December quarters. This softer growth figure dampened the bullish sentiments that had been dominating the kiwi. With the fourth quarter in sight, the bears are now selling the Kiwi against all the major currencies. The question is; when will the selling stop?

The 24th July kiwi rate hike cannot have any significant effect to ease the selling. The markets view the rate increase as a potential catalyst to slower down an already gloomy economy and thus a lower exchange rate. Despite the fact that New Zealand has the highest Official Cash R rate (OCR) compared to the other majors, the high interest rate differential and any speculative pressures that may arise from potential carry trades has to be subdued in the face of a lower GDP growth. A rapidly falling exchange rate will wipe off all the profits that a NZD long carry trade will bring. The market is simply unwilling to support the Kiwi under these conditions. 

We also have to consider the fact that commodity prices have been consistently on the decline. The rapid growth of Chinese demand for commodities has not served to support their prices from falling. At the close of Q3, prices for dairy products for instance, have tumbled over 40% since their highs in the first quarter of 2014. Given the historical sensitivity of the kiwi to commodity prices and the limited decline of the exchange rate, it is clear that markets have not fully priced in this factor. Once the markets price in the commodity prices we expect that the exchange rate will fall even lower than its present levels. 

The  RBNZ is happy to see a  falling Kiwi; statements and sentiments from the reserve bank indicate that they would rather we have a lower exchange rate. Last week, the banks Governor, Graeme Wheeler termed the exchange rate as “unjustified and unsustainable”. He also indicated that the bank was considering an intervention specifically aimed at the exchange rate. This statement has led to the current wave of selling of the NZDUSD and all its other major crosses to the levels we are seeing now.

The bears can expect to have their way with regard to the NZD as the greenback strengthens across the board. Stronger economic reports and bullish expectations for the US have seen the dollar rise against other major currencies. Despite the worries that the rise of the dollar is cooling off, the economic outlook for the dollar is positive. The QE program is terminating at the end of Q4 this year and the FED is expected to raise rates at around Q2 2015.  These expectations will add on to the bullish expectation for the dollar pushing the NZDUSD rate lower.

Wrap up

The market is right now saturated with bearish sentiment for the kiwi. The 3.5% OCR will see a slower economy coupled with lower commodity prices. This is in the backdrop of a bullish dollar and a strengthening US economy.

In the short term, we expect to see a limited retracement of the exchange rate as the selloff cools down. In the long term however we will see a further fall off the exchange rate to below the 0.7400 levels. A great trading strategy for this kind of set up is to wait and catch the down trend when the short term retracement ceases.

 

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