Kiwi Dollar Remains Weak on Poor Manufacturing PMI Data

Kiwi Dollar Remains Weak on Poor Manufacturing PMI Data
July 18, 2018

 

Since the beginning of 2018, the Kiwi dollar has fallen by 4.7% against the greenback, mainly due to deterioration of interest rate outlook, fall in agricultural commodity prices, and decline in investors risk appetite. The price of dairy products has fallen in eight of the last ten auctions. The 5% fall seen on the July 3rd dairy auction, pushed the NZDUSD pair to a two year low of 0.6680. We expect the pair to move down further due to details below.

The Kiwi manufacturing sector continued its expansion in June with a manufacturing PMI reading of 52.8, according to the latest survey report from BusinessNZ.  However, it is lower than the downwardly revised score of 54.4 in May (54.5 before revision), and the lowest level of monthly expansion since December 2017, which recorded a score of 51.0.

New Zealand is primarily an oil importer and an agricultural commodity exporter. The terms of agricultural commodity trade got hit in the second quarter. The economic woe increased further with a rise in the price of energy products. These adverse changes have encouraged investors to sell the New Zealand dollar in the market, leading to a negative impact on the exchange rate.

Since 2016, the Reserve Bank of New Zealand has kept interest rates unchanged at a record low of 1.75%, blaming low inflation and poor wage growth. The central bank has also stated that it will maintain interest rates at these levels for a considerable period of time. On the contrary, other developed economies such as the US, Canada and the UK are raising their interest rates regularly. The scenario incentivises selling Kiwi dollars and buying the greenback to invest in the US bond market.  

In an interview with Bloomberg, JPMorgan Vice President of Global Currency Paul Meggyesi said that during recession New Zealand dollar tend to lose 7%-8% of its value. He also cautioned that the Kiwi dollar is one of the most sensitive currencies in the G10. Meggyesi warned that Kiwi goes down when risk sentiment is down. While the Kiwi dollar has turned weak due to reasons mentioned above, the US dollar is gaining strength due to strong economic data, Trump’s tax overhaul, and imposition of additional tariffs on wide range of goods, primarily from Asia.

In July, the University of Michigan consumer sentiment index declined to a reading of 97.1, from the level of 98.2 recorded in June. Economists had expected a reading of 98.9. Still, the reading is near its one year average of 97.7. Additionally, the unemployment is near 18-year low and job growth is continuing. Therefore, the overall sentiment is still positive.

Despite some softness in the US inflation and wage data for June, the momentum remains on the upside. In June, the inflation grew 0.1%, a notch lower than analysts’ expectation of 0.2%. However, the annual inflation rate is currently 2.9%, which is higher than Fed’s target rate of 2%.

While the US tax overhaul has resulted in an average benefit of $1,300, the additional import tariffs is expected to increase inflation.  To contain inflation, the Fed is expected to regularly raise rates leading to the strengthening of the dollar. Therefore, economic growth and inflation is expected to keep the greenback strong, while an increase in energy prices and weakness in dairy and other agricultural commodity prices is expected to keep the Kiwi dollar weak.

Technically, the NZDUSD pair has broken the support at 0.6880. While the momentum indicator is making new lows, the stochastic indicator is in the bearish zone. Therefore, we are expecting the NZDUSD pair to remain in a downtrend.

NZDUSD - Technical Analysis - 17th July 2018

We may trade the bearishness in the NZDUSD pair by going short at or near 0.6780, with a stop loss order above 0.6880. We intend to book profit near 0.6580.

Additionally, we may also purchase a put option to benefit from the downtrend. Before placing a bet, we would make sure that the currency pair trades near 0.6780. Furthermore, we are planning to select a day around July 25th for the expiry of the option.

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.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


Related Articles

Weak Construction Mfg. Activity Turns Pound Bearish

  A decline in the Japanese manufacturing index in the April-June quarter and the possibility of a soft Brexit convinced

Wells Fargo Winds Up Operations In Four US States

  Amidst poor performance, mounting legal bills, and accusations of bad governance, Wells Fargo & Company (NYSE: WFC), the third-largest

Optimism Over Trade Talks Keep Chinese Yuan Strong

  Notwithstanding a plethora of warnings related to the Chinese domestic economy and the overall bearish sentiment, the yuan continues