NZD/USD Forex Trading Strategy | New Zealand Economy

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NZD/USD Forex Trading Strategy | New Zealand Economy

I just realized it’s been a month since I talked about Mr. Kiwi (New Zealand Dollar, NZD) on the blog! I guess I forgot because we’ve been talking about him extensively with Invest Diva students during our classes. But don’t worry my valued reader. We are going to take care of the this right here, right now. Here are 3 points on the New Zealand Economy, as well as forex trading strategies for NZD/USD featuring Mr. Kiwi and Ms. USA’s dance moves on the forex dance floor.

1- Dairy Prices Drop Again

What does milk has to do with New Zealand’s economy? For new Invest Divas let me explain that the Kiwis heavily depend on dairy exports and therefor the prices can impact the economy. The index that measures dairy prices is called Global Dairy Trade (GDT) which is a sample of weighted-average price of the 9 dairy products sold at the GDT auction.

This week, the GDT price index fell 7.9 percent to an average of US$2345 per metric tonne. It is the third consecutive auction at which prices have fallen. The price index fell 7.4 percent two weeks ago, after dropping 3.1 percent at the previous auction. As you can imagine, Mr. Kiwi is not very pleased with the news and has been dancing downward against his major forex counterparts such as Ms. USA (US dollar) and Mr. Aussie (Australian Dollar) and Mr. Yen (Japanese Yen).

2- New Zealand Unemployment Now Worse than Australia

In November, Kiwi’s jobless rate came out at  6.0% as expected, but worse than October’s 5.9%. Labor force participation rate is now 68.6% vs. 69.3% previous and employment change came in terrible, at -0.4% vs. 0.4% expected. Previous employment change was downgraded to 0.1% from 0.3%.

This was the second consecutive quarter of worsening unemployment levels and to make it worse, labor participation rate has also been dropping for the second straight quarter. Also, employment saw a net decrease of 0.4% or 11K instead of seeing further gains of 0.4%, and the unexpected drop in employment is the first ever since the September quarter of 2012 – that’s three years.

The manufacturing sector saw the largest drop in employment, losing 7.2K jobs or 4.1%. That’s a pretty large chunk! Another downward contributor to job growth was the retail trade industry’s loss of 3.5K jobs or 2.5% of the sector’s total work force, which could be a bad sign for consumer spending.

So now, even though Australia’s economy has been going through extremely difficult times recently, New Zealand is winning the game of worsening unemployment. This has made the Kiwis pretty upset because New Zealand experienced a sustained period of economic growth that is now falling away. They be like: “We should be doing much better than Australia. There is no way our unemployment rate should be higher than the across the Tasman.”

Poor Mr. Kiwi.

3- New Zealand Interest Rates Could Fall Again in December

While we are expecting a interest rate hike int he US, the Kiwis could go the opposite direction according to some analysts.The Reserve Bank of New Zealand (RBNZ) has predicted slowing growth trends to continue well into 2016.

ASB Bank have told their clients they expect the economy to grow at an annual rate of 2.1% early next year, having hit over 3% in early 2015. A lower NZD and lower interest rates should help lift growth back up to around 2.7% by the first half of 2017. Because of the interconnected relationship between Interest Rates and Inflation, lower inflation essentially opens the door to further rate cuts at the RBNZ as the primary danger of lower rates is higher inflation. The RBNZ’s quarterly poll shows business managers expect inflation will be 1.85 percent in two years time, compared with 1.94 percent in the previous period.

So,  in case we see a US Interest rate hike this year, that would strengthen Ms. USA enough to keep the NZD/USD price low enough to support New Zealand’s economy with interest rates kept as is in New Zealand. This situation is very much similar to the case of EUR/USD.

So for 2016, we probably could either see an interest rate hike from the US, or a rate cut in New Zealand or Europe.

4- NZD/USD Technical Analysis

After a whole year of semi-consistent drops since June 2014, the pair faced a pullback towards a long-term 23% Fibonacci retracement level at around 0.69 but was unable to break above it. The NZD/USD pair finally broke below the Daily Chart’s Ichimoku cloud on Wednesday, and now seems to be dancing towards the previous low and support level at 0.63.

A break below this level could open doors for further drops towards lows of 2006 at 0.60 or even further. Alternatively, if the pair suddenly decides to go nuts, move back up and break above 23% Fibo, would may need to change our outlook to bullish with 0.7250 as first alternative target.

Investing Strategy

Adding the fundamentals and technicals to our Diamond Analysis bowl, it seems the pair is under downward pressure. A bearish scenario seems appropriate for the time being, as many investors are buying into the rumors of a US interest rate hike in December, which could push the NZD/USD further down.

Keep in mind that with many investors bullish on the USD, we could expect an exhaustion in Ms. USA’s up-moves, especially if we get a bad US economic data.The “good” news is, the New Zealand economy seems to be bad enough to support our bearish outlook for the time being, and a 0.63 target seems feasible. But don’t go overboard.

Here are the recommended supports and resistance levels* for short term forex trading strategies:

Support Levels Turning Point Resistance Levels
118.50 120 123.50
116.50 121.50 125

In any case, set your stop loss and profit targets a little loose from the below levels, because the naughty currency pairs sometimes change their mind right before a psychological level just to piss the forex trading crowd off. This technique helps you avoid getting kicked out of your trading position prematurely.

*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.