New Zealand Dollar Research Report
Published: Thursday 27 August 2015
Over the course of the month, data releases from NZ have largely disappointed to the downside with employment, retail sales and trade balance figures all missing expectations. GBPNZD has accelerated higher within the uptrend of the last few months.
UK data has been a bit of mixed bag over recent weeks, with UK inflation suggesting the Bank of England will raise rates sooner rather than later but UK retail sales failed to support this view.
So what has been driving this move higher, well the main focus for the market has actually been events in China. With Chinese stock markets continuing to fall, the Chinese government re-valuing their currency and the PBoC (People’s Bank of China) cutting both the reserve requirements and headline interest rates fears over the outlook for the world’s 2nd economy have continue to grow.
As risk sentiment has taken a knock, we have seen US stock markets have their largest 4 day losing streak in history over the course of this week. Stock markets have stabilized over the course of today and are rallying, so risk sentiment is returning and GBPNZD is giving up its gains.
This financial market turmoil has spilled over into the currency markets and we have seen the Kiwi sold accordingly. As a rule of thumb, commodity currencies (Aussie, Kiwi, Rand and CAD) tend to weaken when risk aversion increases and vice versa.
Technically, GBPNZD remains within an uptrend. The long term uptrend that has been in-place since hitting the 1.7712 low (April 2013) but has accelerated over the course of 2015. It is hard to believe but we have seen the market trade from 1.93 or so in April to 2.50+ on Monday of this week.
This uptrend looks set to continue over the longer term, but in the short term we have entered into a corrective phase with the rates falling from 2.5090 to 2.38 over the last 3 trading sessions as stock markets have consolidated and risk sentiment has improved. From a technical stand-point there are a couple of warning signals that a correction has been due.
The main signal being bearish divergence (momentum pointing lower as the rates head higher) on both the daily and weekly charts, this has been the case for the last couple of months and is seen as an early warning that a correction is likely. Unfortunately, divergence does not tell us when a correction is going to occur just that one is on the cards. In the short term this correction looks like it may have further run but over the longer term we should see further gains.
We would expect the correction to find support in the 2.38 region initially (20 day moving average), 2.3622 (daily uptrend support) and then 2.355 (weekly accelerated up channels support) and 10 week moving average (which has underpinned the market since April). As long as we remain above these levels, then the uptrend remains intact and further gains look likely in the short term. A break below these levels could see us head as low as 2.20 (top of previous longer term up channel).
Personally, I do not believe that we will see a move as low as 2.20 as it would take a massive shift in sentiment but it cannot be ruled out.
Should the uptrend resume, there are several levels of resistance that need to be cleared. Frustratingly Monday’s break of resistance at 2.3923 (50% Fibonacci level of the move from 3.0135 to 1.7712) and 2.4016 (recent highs) proved to be a false break with the market failing to hold on to the gains (we would usually look for 3 daily closes or a weekly close above a level to consider it broken). As we’re now back below 2.3923 and 2.4016 this will be initial resistance for any move higher. If we do manage to get a confirmed break of this resistance, this opens up the door for a move towards the recent high (2.509) and 2.5389 (which coincides with the 61.8% long term Fibonacci level and the top of the accelerated uptrend).
It is really a question of time frames, if you have time on your side then place orders in the 2.40-2.50 region which will hopefully be triggered once the uptrend resumes. If you’re looking to make your move in the short term, then it may be best to place a stop loss order below the 20 day moving average (2.38). If you wish to be cautious but have time to work with, then a stop loss below the 10 week moving average seems sensible as a break below this level would suggest a much deeper correction is underway which you will not have time to ride out.
Unfortunately, the trend is against you and there is little to suggest that this will reverse. As we currently look to be in a corrective phase this should be viewed as a selling opportunity. I would suggest converting a portion of your funds in the 2.355-2.36 region as this is likely to provide support with the rest to be traded should this level fail. If the market moves above 2.4016, then I would suggest cutting your losses as the uptrend is likely to be resuming.