Invest Diva students got back in a new bearish position on the NZD/USD currency pair to continue their pip making. But Mr. Kiwi didn’t seem to want to give it up that easily to Ms. USA. However, we have observed 6 factors on the forex dance floor that could make this pair’s dance very interesting and push Mr. Kiwi lower.
1- Technically, correction could be over
Let’s start with the first point of the Invest Diva Diamond Analysis: Technicals. The New Zealand dollar – US dollar pair (NZD/USD) bounced up after reaching a number of our bearish targets , then made it back to where we exit last at 0.6570, making this a very strong support level which also dates back to 2010. A break below this level indicates the possibility of a free fall to the lows of 2009 at 0.62. To back up this bearish out look, the pair remains below the Ichimoku cloud, but with the RSI in the oversold zone. The good news is that we already saw the correction I predicted a couple of weeks ago so the road could be smoother now.
The only thing that could stop a break from happening is a worse than expected NFP numbers on Friday, which could potentially get the pair to form a double top chart pattern. But hey, the road to reaching our goals is never silky smooth, right?
2. Lower-than-expected employment in New Zealand
Next, let’s move on to the fundamentals. New Zealand just released its quarterly employment report for Q2 2015 this week and man did it turn out to be a huge disappointment. Not only did the actual reading of 0.3% fall short of the expected 0.5% gain, but the previous period’s report also suffered a downgrade from 0.7% to 0.6%.
On a more upbeat note, average ordinary time hourly earnings chalked up an annualized 2.8% increase while wage inflation (which includes overtime pay) saw a healthy 1.6% year-over-year gain. But even if people are making more money and salary growth is outpacing New Zealand’s 0.3% annual CPI by a mile, the rising number of unemployed blokes might still end up weighing on consumer spending and overall economic growth.
3. Dairy industry downturn
When a country is heavily reliant on dairy product exports, (HINT: New Zealand) the GDT index (GlobalDairy Trade) better be ticking up to strengthen that country’s economy. Based on the outcome of this week’s GDT auction in New Zealand, the dairy industry is still down in the dumps with another drop in prices. The GDT index, which is the weighted average price of nine dairy products sold at the auction, saw a nasty 9.3% tumble. That’s its tenth consecutive drop so far this year!
4. Weak demand from China
We have been talking about Mr. Aussie being affecting by the Chinese slowdown, but the fact is that China is New Zealand’s biggest customer for whole milk products as well. With the Chinese equity market bloodbath, there’s no denying that the world’s second largest economy is facing a gloomy outlook.
According to a report by the U.S. Department of Agriculture, China is projected to buy only 400,000 tons of milk powder this year, down from the 671,000 tons imported in 2014. Dairy exports from New Zealand to China are down 65% through May and could see further declines in the succeeding months.
5. Falling commodity prices
As if the downturn in the dairy industry ain’t bad enough, New Zealand could also suffer from another leg lower in commodity prices, which might put downside pressure on inflation and force the RBNZ to cut interest rates again.
Earlier this week, ANZ reported a massive 11.2% slump in the average price of the nation’s main commodity exports for July, following June’s 3.1% decline and May’s 4.9% drop. Of course dairy products (-23.1%) were mostly to blame for the drop, as prices are down to their lowest level in 11 years. Aluminum prices were down 2.6% on a monthly basis while forestry products showed a 2.2% drop in prices for July.
Mr. Kiwi’s 6.7% drop this year is its third largest tumble since the series started in 1986. Unlike the RBA which already acknowledged that the Aussie is adjusting to lower commodity prices, RBNZ officials might not be opposed to the idea of further easing or forex intervention.
6. US unemployment claims dropped, NFP coming up
The number of people who filed for unemployment last week dropped to 270K which was lower than the expected 273K but still higher than the week before. Arguably the most important thing that could make or break the NZD/USD this week is the Non.Farm Payroll report that is scheduled to come out on Friday.
The U.S. economy is expected to have added 220K jobs during the month, a slower pace of increase compared to June’s 223K figure. This should be enough to keep the unemployment rate steady at 5.3% in July.
Keep in mind that the previous release churned out weaker-than-expected results for June while the May reading suffered a downgrade from the initially reported 280K figure to just 254K. In fact, the U.S. Bureau of Labor Statistics has been making negative revisions on the jobs figures since February!
Leading labor indicators also suggest a potential disappointment, as the July ISM manufacturing PMI report showed a significant drop in its employment sub-index from 55.5 to 52.7 while the ADP non-farm employment change figure is projected to fall from 237K to 218K. In addition, seasonal swings in employment data from the educational sector in summer could also lead to some surprises.
If you are not in a bearish position already, then maybe you’d want to wait for a break below the support level of 0.65. If you are an Invest Diva student and already jumped in at the correction, then loosen up you stop loss for tomorrow and be patient until our next update!
Suggested stops and limits:
*Important Note: The support and resistance levels are not suitable for all traders and largely depend on your account size, margin and leverage. Book a private lesson to learn how to personalize your account based on our trading guide.