Kiwi declines on Fonterra price drop

Oct 21 2015, 7:07 am

NZDUSD which enjoyed a strong rally over the past few weeks was considerably weaker since yesterday after Fonterra’s Global Dairy price index declined -3.1% down from 9.9% previously. For the most part of 2015, Fonterra’s dairy prices were negative but the recovery seen since August saw the GDT prices trend higher before falling back into negative territory.

NZDUSD’s rally in the past weeks was nothing more than a short squeeze with the rally gaining momentum as S&P upgraded Fonterra’s outlook to stable from negative. The Kiwi also gained as the US Dollar took a backseat in the past few weeks. NZDUSD is currently trading near 0.67 support and we could expect to see a minor bounce to the upside. However, the bias remains to the downside as long as resistance at 0.6785 holds any rallies. A break below 0.65 support could see the bearish trend resume momentum with the potential break below previous lows at 0.626.

The Stochastics oscillator however points to a minimum correction in NZDUSD to the upside towards 0.725 through 0.72 level in the longer run, provided prices are supported near 0.65 level.

NZDUSD – Daily Chart, 21/10
NZDUSD – Daily Chart, 21/10

The weekly chart for the NZDUSD shows prices recently breaking out from the steep descending triangle pattern and the current declines are likely to be confirmed for a retest of the break out region near 0.64 – 0.65 levels.

NZDUSD – Weekly Chart, Descending Triangle/Wedge Breakout
NZDUSD – Weekly Chart, Descending Triangle/Wedge Breakout

There are no major economic releases from New Zealand for the remainder of the week ahead of the RBNZ meeting on October 28th. The markets are currently pricing in a no rate cut from the RBNZ but that could change in the near term. Economic data from New Zealand has been largely stable with the quarterly CPI posting a soft 0.3% increase, down from 0.4% previously. However, to the downside, New Zealand’s GDP remains in question as the second quarter GDP clocked 0.4%. While the Q2 GDP has seen an increase from 0.2% in Q1, the number failed to meet analyst estimates of 0.5% indicating a subdued pace of growth.

The RBNZ does have a choice of either to wait and watch for delivering rate cuts or it could simply cut the over-night lending rate in a bid to boost growth. Obviously, the RBNZ’s rate call is likely to be a close call.

Of interest is the fact that the RBNZ’s monetary policy comes just a few hours after the October FOMC meeting, which could make things very choppy as far as the NZDUSD is concerned and the volatility could be further marked by the US third quarter GDP preliminary estimates, which is currently tracked at 0.9% according to the Atlanta Federal Reserve. Should the GDP decline as shown in the Atlanta Fed’s GDPNow model, it would mark a steep decline from Q2 GDP which clocked an impressive 3.9% growth rate. This could potentially put further pressure on the US Dollar and could put to question the fate of the US Federal Reserve rate hikes.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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