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Watch China, Milk for Kiwi Cues

Watch China, Milk for Kiwi Cues

James Stanley, Contributor

Fundamental Forecast for the Kiwi: Bearish

The New Zealand Dollar continues to display a tight relationship with the bigger overall macro-theme of China and the larger overall threat of an Asian slowdown. Since China began their most recent descent on the heels of the December rate hike out of the Federal Reserve, the Kiwi hasn’t held up well at all. Eleven of the past twelve days have seen the Kiwi trade lower against the greenback (for a total move of -6.3%), and if we match it up with the Yen, it’s even worse – with the same 11 of 12 tally but an even larger move lower; with a full -8.45% lost against the Yen over that 12-day sequence.

Almost like a light switch getting flipped off, the trend in the Kiwi turned sour with the turn of the New Year. While NZD was displaying abnormal strength, unlike many other major currencies, matters changed dramatically after the halt in Chinese markets on January 4th. This is when risk aversion picked up in the global economy and fear began to spread throughout markets. Things haven’t really been the same since; bids seem almost non-existent as investors have begun to duck for cover for fear of deeper development of a slowdown in Asia triggering vulnerable pressure points laid throughout the global economy.

Further complicating matters is the fact that New Zealand’s economic data hasn’t been all that bad: We did see slight misses in building permits and home prices in the early portion of this week, but those were rather minimal misses on data that’s traditionally ‘laggy,’ so the question of these numbers efficacy towards pointing towards leading movements can certainly be questioned.

Perhaps more pertinently, milk prices can potentially indicate the transmission impact of how aggressively a Chinese slowdown might be hitting the New Zealand economy. As a large exporter of powdered dry milk into China, the movements in milk prices have a tendency to correlate with NZD. These milk prices also indicate supply and demand for milk in China, so should China continue facing headwinds this will likely lead to further weakness in milk prices and, in-turn, the New Zealand Dollar. We discussed this premise previously, and since then this correlation has held remarkably well.

So, while New Zealand CPI on Thursday will certainly have some impact towards NZD-performance, far more pressing will likely be the Global Dairy Auction on Tuesday and the movements in Chinese stocks over the next week. The case can even be made, right now, that Chinese economic data is more pertinent and leading for the New Zealand economy than even NZ-data is; and China has a ton of data next week. GDP numbers are released on Tuesday morning (Monday night in the United States and Europe), and this has the potential to roil markets. The expectation is for a 6.9% annualized figure, but should this come in underneath expectations risk aversion could heat up on the threat of a larger Asian slowdown.

For the next week – expect the Kiwi to trade as a risk barometer. As pressures increase, we’ll likely see continued movements lower in the New Zealand Dollar; and should these fears recede, there is a strong chance that we’ll see some element of recover in Kiwi prices. But for where we’re at now, that seems a distant probability, so we are taking a bearish stance and forecast on the New Zealand Dollar for next week.

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