Just when you thought that the Kiwi was in for more gains, a combination of fundamental and technical factors cut the currency’s flight short. What are the reasons for the Kiwi’s recent decline and how long could it last?
1. Jawboning from the RBNZ
Yep, this was bound to happen sooner or later! The moment NZD/USD surged past the .8700 major psychological level earlier this week, central bank officials were on full alert, ready to remind the markets that further Kiwi appreciation could wind up hurting New Zealand’s exports.
In particular, RBNZ Governor Wheeler took the stage yesterday and highlighted the potential impact of a strong exchange rate on monetary policy. In other words, he’s threatening to hit the brakes on the RBNZ’s rate hikes if the overvalued New Zealand dollar starts to weigh on inflationary pressures.
And no, Wheeler didn’t stop there. He even went on to say that the RBNZ would be ready to intervene if necessary! “If the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell NZ dollars,” he warned.
2. Lower prices in dairy auction
If there’s one thing that New Zealand is known for, it’s their enormous dairy industry. That and Hobbiton… and Mordor… and Isengard… Okay, that’s four things. But when it comes to economic activity, what’s important to note is that New Zealand is heavily dependent on its dairy products since these comprise nearly a third of the country’s exports and account for 7% of their GDP.
While the latest dairy auction showed an improvement in order volumes, it also revealed that dairy prices slipped by 1.1% for the month. In fact, over the past couple of months, dairy prices have plummeted by roughly 20%, hurting revenues across the entire sector. This then translates to lower profits and increases the odds of a dairy industry slowdown, which might end up dragging overall economic performance down.
3. Reversal candlestick patterns on long-term time frames
As for technicals, longer-term forex charts have been showing some signs of rally exhaustion. For instance, NZD/USD formed a bearish engulfing pattern on the daily chart, an early signal that a selloff was in the cards.
The evening star candlestick formation on the 4-hour chart confirmed that a drop was likely to take place… and it did!
Will the selloff last or could this be a chance to buy the Kiwi at a better price? Let us know what you think by sharing your opinions in our comment box or by casting your votes in the poll below!