Trade idea: NZD/USD

Sell NZD/USD at $0.6490, place a stop at $0.6588.

NZD
Source: Bloomberg

The NZD has been the weakest G10 currency over past 24 hours relative to the USD, but this has been the case over the past month as well, with the pair falling 4.9%.

From a momentum perspective, being short NZD/USD makes a lot of sense.

Is there any reason to be fighting the strong trend lower at present? I certainly wouldn’t be and there are no clear reversal signs on the daily or weekly charts. When you look at various fundamentals inputs, it also suggests shorts are warranted. Last night’s dairy auction in New Zealand saw an 11% decline in whole milk powder, although futures pricing had largely been predicting this. New Zealand’s terms of trade have been improving of late, but this auction will not reflect well for Q3 GDP on 17 December.

Prior to the Q3 GDP print, the Reserve Bank of New Zealand (RBNZ) will announce potential changes to its cash rate. As it stands, 15 of 18 economists surveyed by Bloomberg see a 25 basis point cut. This is not fully reflected in the swaps markets, so I would not be surprised to see the NZD drift lower into the RBNZ meeting. On the other side of the equation, the two key event risks for the USD will be the November non-farm payrolls on 5 December and the 17 December Federal Open Market Committee meeting.

This is central bank divergence in its purest form so it’s not hard to see why NZD/USD is trending lower.

Interestingly, there is an almost tick-for-tick correlation between NZD/USD and the NZ/US two-year bond spread, where US bond yields are moving up much more aggressively relative to that of New Zealand. These changes positively impact the USD valuation, with global money managers seeing higher potential returns in the US bond market. For NZD/USD to continue trading lower, we will need to see US bond yield tick higher. Given the market is priced at a 68% probability of a move from the Fed in December, there is a real possibility we could see further upside in US yields and thus USD strength.

Technically, I would look at the two-hour chart where we can see a compelling downside break of the November triple bottom at $0.6500. Yesterday we saw a re-test of the former support and a rejection and this should be seen as a bearish development. On the daily chart, momentum and trend indicators are headed lower which suggests a move into the August-September lows could come into play.

In terms of risk management, I feel placing stops above the 11 November high of $0.6588 is prudent. I would take a much more neutral stance on NZD/USD on a closing break of the October downtrend at $0.6690. I am keen to target the $0.6300 to $0.6250 area.

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