The New Zealand dollar has rallied during most of the trading session on Thursday, as we have recovered quite nicely from the surprise interest rate cut from the other day. After all, most people weren’t expecting the Royal Bank of New Zealand cut interest rates, so the fact that they did and then coupled with interest rate cuts within a few hours from both India and Thailand, had people racing for a “risk off” type of move.
The Thursday session was an attempt to reach the vital 0.65 handle. This is an area that should cause a bit of resistance though, I fully anticipate that the sellers will probably come back into this market and push a bit lower. With that in mind I am bearish of the Kiwi dollar, not only because of internal factors in New Zealand, but also because the plethora of issues around the world.
Global slowdown
As you know, there is a global slowdown currently going on. This of course is very negative for commodity currencies such as the New Zealand dollar, and therefore it should continue to weigh upon this currency. This doesn’t mean that we necessarily need to see some type of meltdown, but it certainly doesn’t help commodity markets, which of course the New Zealand dollar is very sensitive to.
The global slowdown should continue as demand for commodities has been falling. We can see that in several markets around the world, both agricultural and hard commodities. (It should be noted that the New Zealand economy is heavily dependent on agricultural exports.)
US/China trade talks
Wellington of course is very concerned about the US/China trade talks as it has a massive influence on what’s going on in China. The New Zealand exports quite a bit of its goods to the Chinese mainland, so all things being equal it is a bit of a proxy for China. (Although it should be noted that the Australian dollar is even more so.) Because of this, we need a strong Chinese economy and Chinese commodity demand for the New Zealand dollar to take off to the upside.
Interest rate differential
With the interest rate cut, the interest rate differential between New Zealand and the United States has shrank just a bit, as the Federal Reserve cutting rates the other day gave a little bit more of the spread between Wellington and Washington DC. That has been sent back to the status quo, so now you can’t make a huge argument for the interest rate differential driving money towards the New Zealand dollar.
The trade going forward
NZD/USD
The trade going forward is to simply look for signs of exhaustion in the New Zealand dollar that you can sell. The 0.65 level will attract a lot of attention as it was not only support but it’s also a large, round, psychologically significant figure. At this point I anticipate that looking for short-term exhaustive candles such as shooting stars closer to that area probably gives you an opportunity to start selling and aiming for the lows that we just hit after the surprise interest rate announcement.
