A combination of a dovish rate hike and struggle by Trump to deliver on the election promises such as corporate tax cut and increased spending on infrastructure has kept the greenback weak for the past one month. In fact, all the gains of the Trump rally have been totally unwound. The New Zealand dollar, in the meanwhile, rallied on strong dairy prices and an increase in the manufacturing activity. However, we expect the NZDUSD pair, which is currently trading at 0.7300 levels, to begin a downtrend due to the reasons mentioned herewith.
According to analysts at JP Morgan, the level of the US dollar underpricing by the money market has gone to extreme levels. Furthermore, the rate-spread models indicate that the US dollar is trading cheap. Additionally, a reversal is seen in the cyclical underperformance of the US dollar. These findings were based on an assessment of the greenback’s value against a basket of major currencies. On the basis of analysis, JP Morgan has determined that the US dollar is undervalued by as much as 2.5% against other major currencies. Thus, JP Morgan analysts are forecasting a rally in the US dollar in the second half of this year.
The New Zealand economy, on the contrary, suffers from several issues such as unsustainable inflation, weak economic expansion, and a peak in the housing market. The Kiwi dollar has also lost its attractiveness as a carry trade currency. In fact, the trade balance data reported by Statistics New Zealand clearly portrays a struggling economy. The trade balance surplus declined to N$103 million in May, from N$536 million in the previous month, and lower than N$420 million anticipated by analysts. The annual trade deficit widened to N$3.8 billion, from N$3.6 billion in April 2017. Thus, considering the details above, we expect the NZDUSD pair to decline in the week ahead.
Technically, the NZDUSD pair is facing resistance at 0.7310 levels. The MACD indicator has made a negative divergence with the exchange rate of the NZDUSD pair. Thus, we can expect the pair to decline to a low of 0.7180, where the next major support exists.
In the Forex market, we would like to create a short position in the NZDUSD pair near 0.7300. If the pair declines as forecasted, we would book a profit near 0.7180. To avoid large losses, we would like to place a stop-loss order above 0.7350.
Additionally, we would also like to purchase a put option to gain as much as an 80% return on our investment. We would buy the contract from a suitable binary broker when the pair trades near 0.7300. It is needless to say that the contract should be valid for a time span of one week.
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.
