3 Reasons Why You Should Think About Selling the Kiwi

Over the past few days, U.S. data and speculations about a Spanish bailout have been hogging the spotlight. However, there have also been a bunch of interesting events happening to other currencies other than the U.S. dollar and the euro.

In fact, much has been going on in New Zealand lately and some reasons to short the Kiwi have popped up this week. Let’s take a look at some of them:

Reason #1: The domestic economy is struggling.

A couple of days ago, Finance Minister Bill English remarked that the current economic growth is weaker than forecasts. According to him, the recent Kiwi rallies are to blame for the huge drop in exports, leading to New Zealand scoring its widest trade deficit since 2009 in August.

For an economy that relies heavily on its exports, a trade deficit of 789 million NZD is no laughing matter. This reflected a large drop from the 97 million NZD surplus in July and was much worse than the forecast of a 617 million NZD shortfall. Components of the report revealed that exports plummeted to their lowest level in 19 months, mostly because of a slump in dairy shipments.

Aside from the strong Kiwi which made New Zealand products more expensive in the international market, the worsening state of the global growth, particularly in major economies such as U.S. and China, is also a culprit for the drop in New Zealand’s trade activity.

Reason #2: The RBNZ could cut rates soon.

Central banks all over the world are easing their monetary policies. The Fed has pledged to an open-ended quantitative easing while the ECB has promised to buy unlimited amounts of bonds should euro zone countries ask for help. Over in Asia, the BOJ has increased its asset purchases by 10 trillion JPY. Heck, even New Zealand’s neighbor, Australia, cut rates earlier this week to stimulate growth.

Consequently, these moves have led market junkies to ask, why not the RBNZ? After all, a rate cut could ease credit conditions to help businesses cope with a slowing economy.

Reason #3: NZD/USD looks pretty darn bearish.

Earlier this week, my good buddy Big Pippin pointed out a double top (which is widely considered as a bearish signal) on the daily timeframe of NZD/USD.

Zooming out to the weekly timeframe, we see that the pair seems to be ripe for a drop too! Reversal candles have formed just below the falling trend line.

NZD/USD Weekly Chart

So, what’s your take on the currency now?

Whether or not these reasons have convinced you to take a bearish stance on the Kiwi, be sure to take them with a grain of salt. Keep in mind that anything can happen in the forex market and these only reflect the humble opinion of this not-so-old man.

  • Shiv

    I think policy makers and local media here (I live in New Zealand) are more concerned about the Housing boom fuelled by low interest rates than appreciating NZD. I don’t remember last time when reserve bank cut the interest rates to help exporters. RBNZ shelled it’s ammo when Christchurch earth quake hit the country. Now the recovery construction spending, payouts are actually helping the GDP. So I doubt interest rate cuts further may be doubtful.

    Also on the other hand NZ exports are mostly agriculture commodities. Due to limited supply, demand side haven’t got effected as much as our counterparts in Australia (who rely more on industrial commodities.) This could be possible explanation for the recent deviation in correlation between AUD vs NZD. Agriculture exports are somewhat cyclical due to their harvest nature, so comparison should be between the same period in the previous years rather than previous months in this year.(I don’t even know those numbers…sorry, it’s just my guess).

    Having said all this I am short on NZD based on the technical play for short term. In the long term I think there is more upside against USD and AUD.