So Mr. Kiwi (New Zealand dollar, NZD) seems to have switched to a brand new bullish sentiment! In my previous update about NZD USD forecast we talked about how a break above 0.6870 could change our forex trading strategies, potentially into a bullish one. Now guess what my beloved Invest Diva readers? IT IS TIME? We need to take a microscopic view on Mr. Kiwi as he dances against recently beaten up Ms. USA. We are going to look at the New Zealand economy together with the recent developments in the US, technical analysis and market sentiment to complete our Diamond Analysis.
New Zealand Economy
1- Manufacturing Expanded in September
Manufacturing activity in the New Zealand expanded at a slightly faster pace in September from the previous month as production picked up and new orders continued to improve.
Business NZ, an advocate for enterprise and businesses across New Zealand said “Production was at its highest level since December last year, while new orders continued to improve. Overall, this should flow through into healthy results for the last quarter of the year.”
So there ya go. Here was your first positive fundamentals for New Zealand.
2- GDP Grew Less than Expected in Q2
New Zealand’s Q2 GDP grew by 0.4%, which is a bit better than Q1’s 0.2%. That’s good news, right? But on an annualized basis, it only grew by 2.4%, making Q2 the second consecutive quarter of slowing annualized growth.
The second-quarter expansion was less than the 0.6% forecast by the Reserve Bank of New Zealand, which was also the median forecast of 16 economists surveyed by Bloomberg News.
Based on trade data, consumer sentiment, and business conditions, some forex traders probably expect Q3’s GDP growth to slow down a bit, but HOT summer and Christmas shopping season is coming up in the Southern hemisphere so we could be positively surprised.
3- Trade Balance was Terrible in September
Yikes! September was the third consecutive month that New Zealand’s trade gap has widened. Its trade deficit jumped from NZD 726 million back in July to NZD 1,035 million in August.
On the surface, the trade data looks horrible for New Zealand economy. However some long-term implications such as higher imports which were due mainly to an increase in capital goods has helped market participants have a more positive outlook on New Zealand than numbers suggest, and probably the reason why Mr. Kiwi has been dancing up ever since the terrifying trade numbers were out!
The next Trade Balance release is scheduled for October 26th.
4- Dairy Prices have Risen
Global dairy prices rose to their highest since March, pulling further away from recent 12-year lows in decreased supply. Yes we are talking mild and cheese here. The higher prices for dairy products is a good thing for New Zealand economy, because their trade balance relies so much on trade exports.
The benchmark GlobalDairy Trade (GDT) price index climbed 9.9 percent beginning of October, however slowing demand in China could still be a drag. China is the biggest market for top exporter New Zealand, which accounts for about 30% of global trade in dairy products.
“All up, the slow start and limited GDT offerings are expected to continue to be price-supportive for now, especially while it’s the European seasonal lull for milk supply and seasonal high period for Chinese milk imports,” ANZ analysts said in a research note.
The GDT prices are released twice a month, and the next reading is coming up on October 20th.
5- Q3 CPI hotter than expected
New Zealand inflation just heated up! During the third quarter of the year prices rose by 0.3%, below the 0.4% gain of Q2 but higher than the median market forecast for an increase of 0.2%.
The above-consensus quarterly print left the annual rate of inflation at 0.4%, higher than the 0.1% level of Q2 and expectations for an increase of 0.3%.
To sum it up, the current data are mixed while trying to paint a pretty picture for New Zealand, but at least the manufacturing sector and inflation seem to be picking up. The increase in imports for capital goods is a good sign too, so New Zealand and the Kiwi could potentially see better times ahead.
US Economy
1- CPI fell 0.2% in Sept vs 0.2% drop expected
U.S. consumer prices recorded their biggest drop in eight months in September as the cost of gasoline fell, but a steady pick-up in underlying price pressures should allay fears that a disinflationary trend was reasserting itself.
The Labor Department said on Thursday its Consumer Price Index fell 0.2 percent last month after slipping 0.1 percent in August. In the 12 months through September, the CPI was unchanged for the first time in four months after rising 0.2 percent in August.
But since the drop met the expectations, market participants took this as a positive signal.
2- Jobless claims fell to lowest level since 1973
This is definitely good news for Ms. USA! The number of Americans submitting applications for unemployment benefits unexpectedly declined last week to match the fewest in four decades.
senior U.S. economist at Societe Generale in New York told Bloomberg that these numbers are pretty impressive. “Both the initial and continuing claims numbers are consistent with the fact that we have a labor market that’s fairly tight and continues to improve,” he said.
So Why the heck did the US dollar decline on Thursday? This must have had to do with the next point I’m about to tell you about.
3- Manufacturing gauges showed slowing
Two regional manufacturing gauges (Philly Fed and Empire State) painted an identical picture in October with both showing a sharp slowing in the industrial sector in the Northeast.
The Empire State manufacturing index, which measures conditions in the New York area, stayed in deep negative territory for the third month in a row for the first time since the depths of the Great Recession. The Philadelphia Fed’s manufacturing index remained in negative territory for the second straight month.
This could have been an effect due to the rising US dollar in the past year, because a strong dollar makes products less competitive in the global market. Keep in mind that this gauge is based on a survey from manufacturers in the past month, so the recent declines in the USD have not been put into effect for today’s reading. However one could argue that effects of the strong dollar in 2014 is still weighing on the manufacturing sector.
Find out more about recent developments in the US economy such as NFP
To sum it up, the US economy has been showing mixed signals in the past few months and an October interest rate hike has therefore almost certainly fallen off the table. The majority of analysts are expecting the first rate hike in 9 years to get delayed well into March 2016. In the mean time, we could see a relief in the US dollar strength for the remaining of the year.
Technical Points
On the daily chart, the New Zealand dollar – US dollar pair (NZD/USD) has broken above a pivot level at 0.6550 and currently testing the second one at 0.6870, which coincides with a long term 23% Fibonacci level. Also on the bullish side, the pair has broken above the Ichimoku cloud. The RSI heading up above the overbought zone which could be an indication that the prices may either rise further or remain in the same level for a bit longer.
The fate of the pair could be determined by the CPI numbers today.
Trading Idea
Look for a break above 0.6870 to confirm further upside in the pair targeting a little below 38% Fibonacci at 0.7250.
A failure to break above 0.6870 would temporarily change our outlook back to bearish and within range of 0.6550. First support is set at 0.62.
Suggested stops and limits:
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 0.61 | 0.6870 | 0.7530 |
| 0.50 | 0.7220 | 0.7810 |
*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.By Kiana Danial
