The Euro dollar is on a tear against the Kiwi dollar for the past one month. Since August 1st, the EURNZD pair had gained nearly 800 pips to reach a high of 1.6486 and closed near that level on Friday. The Euro zone’s June quarter GDP growth of 0.6% strengthened the Euro, while a slight decline in the average dairy prices weakened the Kiwi dollar. However, we foresee a trend reversal in the EURNZD pair due to the reasons given below.
According to Marvin Barth, currency strategist at Barclays, it is time to go short in the Euro dollar as it is trading at a higher level than where it should be on the basis of fundamental valuations. Furthermore, Barth is of the opinion that the Jackson Hole speech of Janet Yellen and the upcoming Fed meeting in September would pave way for the Greenback’s uptrend at the expense of the Euro dollar.
Another argument in favor of the Euro dollar’s decline is that the common currency is currently changing hands near its long-term average. Furthermore, the Euro dollar trades at a 1% premium over the value calculated by Barclays’ BEER model (Behavioural Equilibrium Exchange Rate). On the contrary, the Eurozone is still far away from full capacity utilization and normal benchmark interest rates that prevailed before the 2008 crisis. Additionally, the inflation rate is yet to reach the ECB’s target level of 2%. Thus, we can expect profit booking in the Euro to begin soon. On the other hand, there are solid economic data to back a bullish view of the Kiwi dollar.
On Thursday, Statistics New Zealand reported a trade surplus of N$85 million in July, compared with a deficit of N$351 million in the same period last year. It is the first time New Zealand had posted a trade surplus in five years. Analysts had anticipated a trade deficit of N$200 million for July. Exports grew 17% y-o-y to $668 million in July 2017. Higher value realization from the export of dairy products – especially cheese, butter, and milk powder – resulted in a trade surplus. The value of milk powder was 33% higher than a year ago. Likewise, the volume had increased by 12% on a y-o-y basis. Thus, economic data support the strengthening of the New Zealand dollar against the Euro dollar in the week ahead.
The price chart indicates resistance for the EURNZD pair at 1.6630. The RSI indicator is in the overbought region. It indicates that the currency cross has reached its short-term peak. Thus, we can expect a downtrend to begin soon.
To earn from the currency pair’s decline, we wish to go short near 1.6630, with a stop-loss order above 1.6780. If a trend reversal happens as anticipated, then the profit can be booked near 1.6180. Traders with a higher risk appetite can wait for a deeper decline to 1.5700 levels.
To establish a similar setup in the binary market, we are considering buying a put option valid for a period of one week. We prefer to enter the trade when the exchange rate of the currency pair is near 1.6630 in the spot market.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.
