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Kiwi Catches its Footing Despite Another Spill in Milk Prices

Kiwi Catches its Footing Despite Another Spill in Milk Prices

2015-11-20 23:32:00
James Stanley, Strategist
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Kiwi Catches its Footing Despite Another Spill in Milk PricesKiwi Catches its Footing Despite Another Spill in Milk Prices

Fundamental Forecast for the Kiwi: Bearish

In previous pieces on the New Zealand Dollar, we’ve discussed the correlation between Milk prices and the spot rate on the Kiwi-Dollar. This is kind of like a ‘soft commodity’ correlation, similar to how we’ll often see similar types of moves in metals and the Australian Dollar, or Oil and the Canadian Dollar. For economies that have considerable exposure to these commodity classes, it only makes sense that they price roughly in-line with the source commodity. Should prices go up, that means producers make more. With this additional profit, they can reinvest in their business; they can hire more people and that leads to lower unemployment. Wages then need to rise to attract workers to offset this competitiveness in the economy, and then we have inflation. At this point, Central Bankers will usually look at hiking rates (think of that!), and this could drive trade and capital flows into the market to get this new, higher rate. This is that beautifully synergistic impact of a growth story within an economy.

Well, that’s the opposite of what’s going on in New Zealand and, in turn, the rest of the world right now. Milk prices have been on a steady trajectory lower along with many other commodities, and as we had discussed last month, this has driven the New Zealand Dollar lower. For four consecutive dairy auctions starting in mid-August (auctions take place every two weeks), milk prices were on the rise. This increase lasted all the way to the October 20th auction, and this saw prices in the Kiwi-Dollar rise from a base of price action support at the .6250 area in early September, all the way up to just shy of the .6900-handle. But that October 20th auction showed a decline of -3.1% in dairy prices, and the Kiwi hastened its descent lower. From .6800, to .6700, to .6600 and finally knocking in support at the .6500-handle; and that’s how we started this week, having just caught support at a new major psychological support level.

But the Dairy auction on this Tuesday wasn’t very encouraging as prices spilled (pun intended) by -7.9%, sending the Kiwi even lower to find new support at .6425. A move higher towards the end of the week looks to be more positioning based, as the US Dollar put in considerable weakness on Thursday and this reflects in the NZD/USD spot.

With a holiday-shortened week in the US coming up, and with no major Kiwi data and no dairy auctions until we get into that first week of December that is just absolutely loaded with data, we may be nearing an attractive entry point for a short-side resumption play. Traders can look to base stops at .6650 to get risk levels above recent highs, with targets set towards those previous lows of .6200. With so little news on the docket, the week after next looks significantly more attractive for trend-continuation plays, but the ranges produced ahead of the data could offer adequate entry opportunities with an eye on the following week.

The forecast on the Kiwi-Dollar remains bearish.

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