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For the Kiwi, it’s All About the MilkFor the Kiwi, it’s All About the Milk

Fundamental Forecast for the Kiwi:Neutral

  • NZD/USD traded to a new intermediate-term high this week on the back of better-than-expected results for a key export of the economy:Dairy.
  • Traders With 30 basis points of rate cuts over the next 12 months already priced into NZD/USD, a weak dollar combined with improving dairy prices could provide impetus for a new up-trend in the Kiwi.
  • Follow real-time trader positioning in NZD/USD with the SSI Snapshots Indicator.

After embarking on one of the most emboldened down-trends of the year, the Kiwi-Dollar spent the better part of two weeks attempting to break-through support at the ‘panic lows’ of August 24th. As buyers continued to support this line-in-the-sand level, fundamental items from the United States and Global Dairy Auctions may have provided the impetus for a new up-trend in the pair.

One of the primary culprits of the down-trend that saw NZD/USD trade lower by over 17% from July of 2014 to August of 2015 was the dichotomy in rate expectations between the US and New Zealand economies. While the US was finally seeing initial signs of growth and the Federal Reserve was proffering the possibility of finally ending ZIRP (Zero Interest Rate Policy), the New Zealand economy was mired in continued economic weakness driven in large part by the slowdown in China and the collapse in Dairy prices that came along with it.

On Tuesday, Dairy prices rose for the third consecutive auction, providing hope that inflationary pressures might continue to form in this key export for the New Zealand economy. Dairy prices moved up by 16.5% in the most recent auction, improving on the 10% gain earlier in the month and the 14% pop in the commodity at the second August auction. Before this, prices had seen ten consecutive bi-monthly auctions with lower prices: The hope is that a low has been set and that a new up-trend may be forming, which could be a huge positive for the NZ economy; and may even dash hopes for future rate cuts from the RBNZ.

With the Fed backing off of the September rate hike and with 30 basis points of cuts already priced into the Kiwi, NZD/USD could continue to float higher on the back of a weaker USD; at least until the next dairy auction or RBNZ rate decision, in which markets are pricing in an approximately 40% chance of a 25 basis-point cut. But the next dairy auction isn’t until October 6th, and the next RBNZ announcement until later in the month on October 29th; so the intermediate-term can see continued Kiwi strength on the back of mean-reversion tendencies after an outsized move was unable to budge below the .6200 zone of support in the pair; and with USD weakness on the back of a more dovish Fed this theme could continue to solidify in the coming weeks.

Next week is rather light on Kiwi data, the highlight of which is August trade data to be issued on Wednesday. Outside of that, US Durable goods on Tuesday morning could be market moving; but more likely the more prominent push points will be based on equity performance in Asia and the continued fall in commodity prices. But in New Zealand, the 16% pop in Dairy prices can provide hope for future increases, which may end up providing a long-lasting bottom in the NZD/USD market.