Kiwi Is Rolling Over
By Jonathan Clark - 28 feb 2013
In last week’s commodity currency commentary we questioned whether the strength of the New Zealand dollar unfairly disadvantaged the country. In a recent speech, RBNZ Governor Graeme heeler spoke about the overvalued Kiwi, but once again stated there was little the central bank could do about it. The main levers for weakening a currency are cutting interest rates, intervention, quantitative easing and implementing a ceiling, all of which Mr. Wheeler pointed out have drawbacks or only work for a limited period. It appears the central bank is telling the markets to do what they want with the currency. Some traders take this hands-off approach as a green light to buy the Kiwi, but we don’t agree. Kiwi is one of three most actively traded commodity currencies and the other two, namely the Australian and Canadian dollars, have broken out of their narrowing trading ranges to the downside. These currencies historically correlate strongly with each other so this is negative for the NZD.
Although commodity prices turned down in September, hitting the other two, the Kiwis seemed immune for a while, but a basket of NZ commodity export prices began trending lower in the start of November last year, undermining export earnings. The major factor that has propped up the Kiwi is a slight move higher in New Zealand interest rates, but this is during a time of global optimism. When this fades, interest rates will start to sag (our cycles call for lower rates into the end of March) and this will drag down the currency.
The longer-term cycles call for the Kiwi to trend lower into April. The Kiwi has most likely formed a medium-term peak. It tested the strong resistance between .8500 and .8520 late last week, but failed to close above it. It fell sharply on Wednesday and is close to breaking below the support from the low in June, currently at .8335. A close below this level will confirm it is headed lower the week of March 4 or the following week when an initial bottom is due. It should fall to the .8200 area before forming a low and recovering for a week or two. The downtrend should then resume into the first half of April. If the Kiwi falls to the .8200 area during the first half March then we expect a further downmove to the .7975 area in April. Following this low we expect the Kiwi to rally for a month or two. It will take a close above the .8500 and .8520 to signal we are premature in calling a peak. In this case it is headed higher into the second half of March, but this is far less likely.
