Some Macro Headwinds

There are several reasons why NZD bears downside risks from a macro standpoint:

  • The housing market continues to heat up
  • New Zealand’s economy is subject to outside shocks, the best example being a potential China & commodities slowdown
  • RBNZ chief Wheeler (the Dealer) repeatedly reminds us that the NZD is higher than is sustainable for balanced economic growth
  • Inflation still needs to reach at least the middle of its target range for expansion

The Kiwi has been quite resilient since late 2015 but fundamentals are slowly catching up. Having said all that about the macro standpoint, what traders should really focus on here is the deteriorating technical picture of the NZD across the board.

NZD technical picture looks weak

Without being too “wordy” here, let’s start off with the NZD/USD and work our way down.

The NZD/USD failed again at the .7400 in recent weeks, and we are now approaching channel support. If broken, this would be a very bearish event for the pair (just below .7000).

The NZD/JPY posted a double top on the daily, we are currently breaking the neckline now.

The EUR/NZD just broke out of a descending wedge. For the record, this is my favorite reversal pattern (technically). Obviously, the risks around the French elections are high, but you can’t deny the momentum we have seen as the pair has broken higher.

The GBP/NZD has a major triangle pattern which is probing the top end of the triangle. With the invocation of Article 50 just around the corner, risks surround this pair. However, arguments have been made that the GBP has already priced in most of the risks moving forward.

The NZD/CAD had a massive topside breakout failure last year. Patterns like this usually lead to a breakdown. Specifically, a break of the year long trend line (red) would be outright bearish. Note that we are currently testing the 200DMA.

The AUD/NZD is a pair that is trading at levels not seen since mid 2016. With a possible trade war with China looming, that is a risk for the antipodean currencies. Now that China is the biggest trading partner of New Zealand, maybe a trade war between the US and China could have a bigger impact on NZD than AUD at this point?

One last point. Typically, when the market goes “risk off” (which means that stock markets, commodities, etc. come under selling pressure) the currencies most likely to fall first and hardest are commodity currencies and ones with higher interest rates (carry purposes). Considering the equity markets at current prices, that risk gets greater the higher we go. In a world of ZIRP for the most part, NZD OCR at 1.75% is one of the highest central bank rates for the major currencies. And it is a commodity currency. Could be a double whammy.

Blake Morrow