Kiwi consolidates over support as geopolitical tensions ease
Kiwi consolidates above major support as geopolitical tensions ease
By Garry Dean
(Sales Trader, CMC Markets New Zealand)
12 August 2014
The Kiwi has been hit hard by a combination of factors, with last week’s 8.4% fall at the fortnightly GlobalDairyTrade auction now taking the total fall since February to a staggering 40%. Having already cut the 2015 season forecast price from $7.00 to $6.00, the risk is increasing that this level may need to be cut further, and this would potentially wipe more than 2% off the GDP rate. The Kiwi has also faced strong headwinds from a strengthening US Dollar, with the US Dollar index trading last week to highs not seen in almost a year, as the market assessment of rate hikes from the Fed are crept forward.
The perception of a hold in the rate hike cycle from the RBNZ until the first quarter of 2015 has analysts reassessing the potential for the OCR to increase to 4.50% by the end of 2015, and this is posing questions for carry-trade investors. The decline in NZD/JPY from recent highs near 90.00 to 86.50 currently is significant, but from a technical perspective we trade currently right on the 200-day moving average. More importantly, the 50-week moving average sits at 85.60, and this hasn’t been breached in almost two years. A break below this level would very likely encourage a liquidation of speculative carry-trade positions.
The NZD/USD has fallen close to 5% in just over a month, and is consolidating at present within a range of 0.8425 – 0.8500. The 50-week moving average at 0.8425 is providing major support, and it was interesting to see the currency close above this level on Friday, following the sell-off in risk assets after news of US air strikes in Iraq. Geopolitical risks remain a key factor in assessing risk appetite at present, and the weekend’s news of Russian troop withdrawals from the Ukraine border has encouraged a return to risk assets, with equity markets posting solid gains to start the week. We have seen over the past few months how unpredictable Russian President Putin can be however, and renewed speculation of a Russian ‘humanitarian’ convoy of supplies to pro-Russian insurgents in Donetsk has the potential to escalate tensions in the region.
Last week’s Q2 (NZ) unemployment data saw a drop in the unemployment rate to 5.6%, with labour costs rising at their highest level in a year – something the RBNZ will continue to watch with interest. The jump in Australia’s July unemployment rate to 6.3% means for the first time since March 2009 NZ’s unemployment rate is below Australia’s. There are some concerns being raised in Australia, with the RBA last week revising lower their inflation and GDP forecasts, and this has kept downward pressure on the Aussie. This should be positive for the NZD/AUD cross rate, with a break above resistance at 0.9160 likely to encourage further gains.