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NZD/USD Downtrend Simply Isn’t Worth Fighting Yet

NZD/USD Downtrend Simply Isn’t Worth Fighting Yet

David Cottle, Analyst


Just getting started in the NZD/USD trading world? Our beginners’ guide is here to help

The New Zealand Dollar remains in clear retreat from the 2017 highs made in August against its big, US brother.

While there are solid fundamental reasons to buy the kiwi, which I think could loom larger in time, now is probably not the time to start fighting that trend.

There are three key reasons for this.

One is the approach of the Jackson Hole central-banking symposium. Under the auspices of the Federal Reserve Bank of Kansas City this annual Wyoming conclave has become central banking’s Woodstock. 2017’s headline all is all-too likely to be Fed Chair Janet Yellen. If she does as markets increasingly expect, and leaves another interest rate rise very much on the cards for this year, then the US Dollar might get a broad fillip. That’s always assuming of course that rhetoric on both sides of the border between North and South Korea continues to cool and that broad risk appetite holds up.

Then there’s the New Zealand economy itself. The most recent trade numbers may have been stunners, with a rare surplus recorded. But the overall picture is gloomier and the government has downgraded growth forecasts, suggesting that it sees little room for higher interest rates and the currency support which might come with them.

Another problem for kiwi bulls remains the currency’s own central bank. It has recently worried once more about the possible baleful effects of a strength and even gone so far as to remind investors that intervention in the markets remains an option should New Zealand Dollar bulls push too hard. Don’t forget that this year’s August peak for NZD/USD is also the pair’s highest since May 2015.

Of course, as I said at the beginning, there are solid reasons to like the kiwi. Even with its base rate at a record low of 1.75% the currency offers a yield advantage over the US Dollar. And unlike its Australian cousin it will continue to do so even if US rates do rise once more. It also offers the security of high credit ratings. NZ is “triple A” with Moody’s and “AA+” at both Fitch and Standard & Poor’s. If the regional economy continues to fire (watch China’s Purchasing Managers Index figures next week), then it’s not unreasonable to expect the New Zealand economy to perk up too. If it does the NZ Dollar will go with it, whether the Reserve Bank likes it or not.

But, for now, go with the path of least resistance. That’s the path lower.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.