Strong Inflation Outlook Strengthens New Zealand Dollar

Strong Inflation Outlook Strengthens New Zealand Dollar
February 15, 2018

 
Better than anticipated employment data propelled the New Zealand dollar against the greenback in the first week of February. The NZDUSD pair also got a boost from an unexpected increase in the wholesale inventories in the US. Since February 7th, the NZDUSD pair has gained about 200 pips to trade at 0.7350. We expect the rally in the NZDUSD pair to continue due to reasons given below.

In the recent dairy auction conducted in New Zealand, the average global dairy prices rose 5.9% to $3,553 per ton. It was the third consecutive price rise on the global dairy auction. Further, the whole milk powder price, which determines the payout to farmers, increased 7.6% to $3,226 per ton. It is the highest recorded price in eight months.

Commenting on the price rise, Massey University director of business innovation and strategy Professor Hamish Gow said “We’ve got a shortage on the market at the moment, this is a standard seasonal challenge that we have in February every year where milk production goes down in both Europe and North America. New Zealand, we’ve had a dry summer, production is a little further down than it would usually be… All those combine to push prices upwards.”

In addition to the increase in dairy prices, the latest inflation survey report released by the RBNZ (Reserve Bank of New Zealand) is also strengthening the New Zealand dollar. The survey report indicates that there is a considerable increase in the number of businesses expecting inflation to rise over the coming years.

Annette Beacher, chief Asia Pacific macro strategist at TD Securities, said “Also, 5y and 10y inflation expectations at 2.09% and 2.05%, respectively support the RBNZ view last week that ‘long-run inflation expectations remain anchored at 2%’.”

The report on inflation expectation for the next two years was based on a survey of 100 consumers. Most consumers expect the inflation to rise to 2% in 2018 and cross above that level in 2019.

While the inflation outlook and dairy data strengthens the Kiwi dollar, the US dollar weakens mainly on the proposed budged for 2018.

The proposed budget, released by the Office of Management and Budget, includes a commitment to increase spending that will further widen the US budget deficit. The Forex markets reacted negatively to the plan due to two reasons. Firstly, the market has little hope that the budget will pass through. Secondly, the budget deficit is expected to significantly slow down the economy in the future.

The market will certainly respond positively if the money is spent in the right areas that would deliver an acceleration in the economic growth. It can be remembered that during the US Presidential race, Trump campaigned for an increase in infrastructure expenditure. A budget plan that would set aside funds for infrastructure development would be positive for the US dollar. However, the market does not expect any significant economic growth from the proposed budget plan which will lead to further widening of the fiscal deficit. Therefore, the US dollar is weakened by the budget plan.

On the economic front, the commerce department reported a decline in retail sales in January. On a m-o-m basis, the retail sales declined 0.3%, versus market’s expectations of a 0.2% growth. In December, the retail sales growth was unchanged from the previous month. Similarly, the core retail sales growth remained unchanged in January, following a 0.1% growth in the previous month. Analysts were expecting a core retail sales growth of 0.5%. Consumer spending is the main driver of the US economy and the current quarter has started with a decline in momentum. Notably, retail sales recorded a 3.8% annualized growth in the fourth-quarter of 2017. The facts discussed above supports a rally in the NZDUSD pair.

The NZDUSD pair is forming an inverted head & shoulder pattern, as shown in the image below. The on balance volume is also rising. Therefore, we anticipate a continuation of the prevailing uptrend in the NZDUSD pair.

NZDUSD - Technical Analysis - 15th February 2018

To earn from the current rally, we are planning to open a long position near 0.7340. To minimise risk, a stop loss order will be placed below 0.7210. We will also place an order to book profit at 0.7560.

Additionally, we may also purchase a call option with our surplus funds. However, the option contract offered by a binary broker should be valid until February 23rd. The NZDUSD pair should be trading near 0.7340 in the spot Forex 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.

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


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