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The New Zealand Dollar is down to lows not seen since early 2016 against its US big brother, and has shed nearly 10% this year so far. However, the kiwi’s punishment beating could be far from over yet.
Of course, it’s no great news that interest rate differentials support the US Dollar against it. They do against all major traded currencies and look set to continue to do so for some time. As the Federal Funds Target Rate just keeps rising, New Zealand’s roughly equivalent Official Cash Rate languishes at its 1.75% record low. It is not expected to move this year and, indeed, until well into next. However, the global growth cycle would be extremely mature by then, and any medium term changes are subject to innumerable variables. Upshot: a rise is not set in stone.
There are one or two other uncomfortable fundamental factors for kiwi bulls. Firstly it seems that the nation’s key diary trade remains oversupplied. Fonterra is the co-operative that manages a lot of the sector and it downgraded its milk-price forecast earlier this month. Then there is China. Amid mounting evidence that its economic expansion is slowing, New Zealand’s huge agricultural trade with the world’s second largest economy could come under further pressure too.
Given all of the above, it’s perhaps not surprising that the most recent Commitment Of Traders data from the US Commodity Futures Trading Commission showed record levels of short positions against the New Zealand Dollar. This very fact may offer some scope for a modest near-term rebound, but records are there to be broken and the fundamentals suggest that NZD/USD can go lower year, and it probably will.
As for how much lower, well, a look at the pair’s monthly chart finds it already threatening the base of a range that had previously limited downside since the summer of 2015. Should that give way in the months ahead then the long climb up from the post crisis lows of 2008 will be under threat.
For as long as US monetary policy is tightening then that giving way looks all but certain. Much of this logic can also be applied to shorting the Australian Dollar, but the Aussie economy is more diverse than New Zealand’s and, while things don’t look great for its currency, shorting the Kiwi may well make more sense.
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— Written by David Cottle, DailyFX Research
Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!