Strong Rise in Dairy Prices Turns Kiwi Dollar Bullish

Strong Rise in Dairy Prices Turns Kiwi Dollar Bullish
April 24, 2017

The New Zealand dollar was a notable gainer against the Yen last week. Strong inflation data from New Zealand pushed the Kiwi dollar upwards. On the other hand, narrowed trade surplus in March turned the Yen weaker. The NZDJPY pair climbed about 100 pips to close at 77.76. We anticipate the uptrend to continue this week due to the reasons provided underneath.

Apart from inflation, employment, and GDP growth data, another important factor which affects the strength of the New Zealand dollar is the price of dairy products. In the auction conducted on April 18th, the GDT index gained 3.1% and lifted the average price of dairy products to $3,139 per ton. This is the third consecutive gain in the price of dairy products. The gains from the past three auctions have now completely offset the 6.3% decline recorded in February.

The rise in consumer prices by 1% on q-o-q basis in March, against market’s expectation of 0.8% increase, is also expected to support a rally in the New Zealand dollar. The annual inflation rate hit a five year high of 2.2%. Commenting on the inflation, Michael Turner, currency strategist at the Royal Bank of Canada, stated that the odds of an end to the easing cycle have increased considerably.

Most of the recent demand for the Yen is due to an increase in political uncertainty caused by the French election and Syrian conflict. More importantly, the Yen surged due to a large scale unwinding of short positions in the futures market. The COT (Commitment of Traders) data indicate that the overall short positions in the Japanese Yen have decreased by almost 40% compared to December 2016. Last week, short positions in the Yen decreased by 11,036 contracts to 34,800 contracts. It is the fourth consecutive week of decline. The Yen is expected to weaken on account of a decline in the short positions.

The New Zealand dollar is also expected to get a push from an increase in the ‘carry trade’ aided by the yield differential between the Kiwi dollar and Yen. Notably, at the end of April 11, 2017, short positions in the New Zealand dollar stood at 15,100 contracts, up 429 contracts from the previous week. Thus, we can expect the NZDJPY pair to rise further in the coming week.

The NZDJPY pair is moving along an ascending trend line, as shown in the price chart below. After staying nearly flat for most of last week, the accumulation/distribution indicator has started rising. This indicates an increase in momentum. So, an uptrend can be expected as long as the level of 76.40 is not violated.

NZDJPY - Technical Analysis - 24th April 2017

A long position in the NZDJPY pair can be taken near 76.90 in the Forex market. By placing a stop loss order below 75.80, losses that may arise from an unexpected volatility can be limited. If the cross rises as expected, then the profit can be booked near 78.40.

Likewise, a binary trader can contemplate on putting money into in a call option which expires in the first week of May. The option should be preferably bought when the ask rate for the currency pair is about 76.90 in the OTC market.



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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