The Great Kiwi Slump of 2015

The Kiwi was out of luck in 2015 since it lost to all its forex rivals, with the Loonie being the sole exception, but that’s probably more to do with the Loonie’s own weakness due to the 2015 drop in oil prices rather than any inherent strength on the part of the Kiwi. Anyhow, an overlay of several Kiwi pairs on NZD/USD, as shown on that there chart below, helps to filter out opposing currency forex price action and shows that the Kiwi had four major periods, which I’ll be briefly discussing in this forex review. Also, do note that the daily forex price action for GBP/NZD and EUR/NZD are inverted, so don’t become weirded out when you look at your own charts.

NZD/USD Daily Forex Chart

NZD/USD Daily Forex Chart

A. Warning Signs of The Great Kiwi Slump

The high-yielding Kiwi was pretty stable at the start of the forex trading year, but began encountering sellers (or losing buyers) when risk aversion set in after the SNB removed the 1.2000 floor on EUR/CHF, which I already discussed in my 2015 forex review for the Swissy. Another factor which weakened demand for the Kiwi was the Dec. 20 release for Q4 2014’s CPI reading, which showed that CPI was now in negative territory for the first time in two years (-0.2% vs. 0.0% expected, +0.3% previous).

Yet another major factor which drove the Kiwi lower against most of its forex rivals was the RBNZ’s sudden switch into a less hawkish tone. If y’all can still recall, problems in China were not yet prevalent, dairy prices were recovering, New Zealand’s economy was still doing A-okay, and the RBNZ was on a rate hike spree back in 2014, so forex traders and market analysts were actually expecting even more hints for the timing of another rate hike. It was therefore akin to being bushwhacked or ambushed when RBNZ officials suddenly switched to a more cautious tone during their Jan. 28 rate decision and statement due to concerns over inflation brought about by the great oil slump of 2014. Demand for the Kiwi, quite naturally, suffered as a result.

B. The Calm Before The Slump

The Kiwi’s slump was stopped (and even temporarily reversed on some Kiwi pairs) when dairy prices continued to recover, with the GDT price index printing a 9.4% increase during the Feb. 3 auction and a 10.1% increase during the Feb. 17 auction. To the forex newbies out there who are reading this and wondering what milk, cheese, and other dairy products have to do with New Zealand, just know that around 25% of New Zealand’s exports are dairy products, so cows are quite literally cash cows in New Zealand.

Moving on, forex traders were also probably looking at the economic reports coming out of New Zealand, and they were mostly positive. The jobs report released on Feb. 3, in particular, showed that wages by 0.5% quarter-on-quarter during Q4 2014 and 1.8% on an annualized basis, which could mean potentially higher consumer spending and more inflationary pressure to counter low inflation levels in the future. However, the Kiwi’s recovery was capped when China announced a surprise rate cut on Feb. 28. But the fact that the RBNZ backpedaled on their more cautious tone and announced that rate cuts were probably not needed during their March 12 rate statement helped to keep the Kiwi supported.

C. The Great Kiwi Slump of 2015

And so we finally come to The Great Kiwi Slump of 2015. Trend followers who got in early probably made a killing riding the Kiwi’s slump from late April to early September. The down move on NZD/USD, for example, yielded over 1,400 pips. Yummy! Yummy!

Anyhow, the Kiwi slump was driven mainly by round after round of drops in dairy prices and deteriorating economic conditions in New Zealand, which ultimately forced the RBNZ to cut rates back-to-back on June 10, July 22, and then on September 9. This was also a period of great market turmoil and risk aversion due to the Greek drama, signs of a renewed slump in oil prices, and the freefall in Chinese equities, not to mention further easing moves and deteriorating economic conditions in China, as well as the PBoC’s decision to devalue to yuan. All that chaos, particularly those related to China, naturally dissuaded forex traders from loading up on the higher-yielding Kiwi.

And before you ask what China has to do with New Zealand, just remember that all those dairy exports have to go somewhere, and most of them go to China. In fact, around 20% of New Zealand’s total exports make their way to China.

D. The End of the Great Kiwi Slump?

The Kiwi’s slump slowly lost momentum by the end of September, as dairy prices began to show signs of a recovery and New Zealand’s manufacturing sector began to pick up. However, it wasn’t until early October that demand for the Kiwi began to ramp up, as the slowdown in the Chinese economy began to show signs of, well, slowing down and risk appetite began making a major comeback amidst rallying commodity prices.

Also, RBNZ Governor Graeme Wheeler gave an Oct. 13 speech wherein he implied that the RBNZ was hesitant on cutting rates further because of the possibility that it would contribute to overheating the housing market. Wily forex traders who caught that juicy information probably began betting that the RBNZ will be keeping rates on hold, sending the Kiwi higher against most of its forex rivals.

Those wily forex traders then probably began unwinding their positions when the RBNZ didn’t cut rates as expected, which explains why the Kiwi tumbled after the Oct. 28 rate decision. Although it could have been due to the GDT price index beginning to drop again as well.

Demand for the Kiwi began picking up again after that, due to strong bouts of risk-taking in November and December, as well as signs of improvement in New Zealand’s economy. And while the RBNZ slashed rates during their Dec. 9 rate decision, RBNZ Governor Graeme Wheeler also expressed that RBNZ officials “expect to achieve [their inflation target] at current interest rate settings,” which heavily implies that they aren’t planning to cut rates further, which is probably why the Kiwi kept climbing higher.

Final Thoughts

Overall, the main drivers (and drags) on the Kiwi’s forex price action weren’t as straight forward as, say, that of the pound or the Loonie. However, rate cut expectations and the RBNZ’s monetary policy biases were clearly in play, which was pretty obvious at the start of the forex trading year, and became more apparent throughout the course of the year. Dairy prices, reports from or about China, and global risk sentiment were also major factors that determined the Kiwi’s forex price action.

So where will the Kiwi go from here? Will the RBNZ be cutting rates again in 2016? If so, will that drag the Kiwi ever lower? Are you expecting dairy prices still to go lower? Or is the current uptrend a sign that the Kiwi’s slump has bottomed out? Leave a comment below or vote in our poll on where you think Kiwi will be at by the end of 2016!