Sive Morten
Special Consultant to the FPA
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Greetings,
Today, guys, I thought, it makes sense to replace gold analysis by some FX pair, just because on gold market we do not see big changes on long-term picture and daily videos will be enough to keep finger on the pulse.
At the same time we see significant changes on Kiwi dollar and it is long time passed since we've taken a look at it last time.
Fundamentals
In fact just one month ago NZD had positive perspectives and indeed, it has shown pretty nice rally. Last time we positively assessed kiwi future in long-term period, but it was a bit overextended by CFTC data
and we suggested some retracement down.
In reality overbought situation coincided with political elections in NZ and turmoil that has followed to it. Shortly speaking political rivals have got approximately equal amount of votes and this has made creating of
government rather difficult.
(Reuters) - New Zealanders will likely need to wait several more days to find out who will form the new government in the South Pacific island nation, the small nationalist party holding the balance of power said on Thursday.
The New Zealand First Party was holding a fifth day of talks with both the ruling National and the opposition Labour Party to form a coalition government, almost three weeks after an inconclusive general election.
Prime Minister Bill English’s ruling National Party won 56 seats in the Sept. 23 election, while a Labour-Green bloc have 54 seats, leaving both needing New Zealand First’s nine seats to meet the 61 seats needed for a majority in parliament.
New Zealand First leader Winston Peters said that he was “pretty confident” that those talks with the main parties would conclude on Thursday evening, but said the NZ First board would not meet to discuss its options until the weekend at the earliest.
“It depends upon the logistical availability of the board which will be Saturday, Sunday or Monday,” Peters told reporters. “I’ll know that before too long.”
Asked whether the public would know who the government is by the end of next week, Peters said yes,the Stuff.co.nz media website reported.
The political limbo has pushed the New Zealand dollar, the world’s 11th most traded currency, down by around 3.3 percent since the vote. The Kiwi was trading at $0.7103 mid-afternoon on Thursday after hitting a four-month low earlier this week.
Two recent independent surveys have suggested the uncertainty is curbing business sentiment, although official data released on Thursday indicated that consumer confidence remained robust.
There are also concerns that a government including the nationalist NZ First would lead to more interventionist economic policies. Peters fueled those fears earlier this week when he said that exporters should welcome the recent fall in the local currency.
NZ First also wants to restrict foreign investment, curb immigration and renegotiate certain trade deals.
Strong immigration has been blamed for the country’s hot housing market and unaffordable prices. Data from the Real Estate Institute of New Zealand released on Thursday showed that the number of properties sold in September was the lowest for that month for six years, as the market awaited an election result.
Peters lost his own seat in the election to a National candidate but remains the lead negotiator and eligible for a ministerial post as leader of NZ First.
He said talks so far had focused on policy, with no discussions yet on ministerial portfolios or offices.
Peters said he was aiming for a “serious consensus” from the NZ First board on which party to support, but he declined to identify or number those board members.
But this is only the half of the problem. Another half is impact on NZ Central bank, which policy principals could change vector:
Reuters: New government in New Zealand could spell changes for pioneering central bank
The formation of a center-left government in New Zealand after an inconclusive election last month would likely spell big changes for its central bank, the pioneer of the inflation-targeting regime adopted across the world.
The Labour-Green bloc has an even chance with the ruling National Party to form a government, if it can agree to a deal with the nationalist New Zealand First Party after talks this week.
For 28 years, New Zealand’s central bank has had the single aim of keeping inflation between a set range. But Labour wants to add employment to the bank‘s mandate, a goal shared by NZ First which also wants to broaden the Reserve Bank of New Zealand’s (RBNZ) focus to include greater management of the local dollar’s value against other currencies.
“It’s a huge change. We’ve had over 25 years of an extraordinarily successful monetary policy that has been copied around the world,” said Arthur Grimes, RBNZ’s chief economist in the early 1990s and Board Chair between 2003 and 2013. Any change without careful consideration and analysis would be “extraordinary”, he added.
New Zealand was first to formally grant its central bank independence and first, in 1989, to introduce an official inflation target after grappling with annual price rises as high as 18 percent during the 1980s.
Though its economy is only the world’s 53rd largest, New Zealand has earned a reputation for its economic experimentation and free market approach over the past three decades.
Its inflation targeting soon became the global economic orthodoxy.
“I don’t think people treated it terribly seriously (at first),” said Ted Truman, a former U.S. Federal Reserve official, who spent a month in New Zealand 16 years ago researching inflation targeting.
“Five or six years later it was much more respected and people flocked to New Zealand to find out how they were doing it... which is why I was there.”
Don Brash, who was governor when the inflation target was introduced, said the idea came from a TV interview with Roger Douglas, a Labour finance minister in the 1980s. Douglas was asked if he was happy with a drop in inflation to below 10 percent.
“He said: ‘No, I‘m looking at price stability like zero to 1 percent’ and that was I think the first formulation of the target in numerical terms,” Brash told Reuters.
The initial 0-2 percent target was widened in 1996 and then lifted in 2002 to its current 1-3 percent.
New Zealand’s per capita income dropped during the radical reforms of the 1980s but has since stabilized. Its employment rate has consistently out-performed other developed countries for the past decade and inflation has remained in check.
DUAL-MANDATE CLUB
Labour has said it is committed to the inflation target but wants to add the goal of full employment, bringing it in line with the likes of Australia and the United States.
Reserve Bank of Australia (RBA) Governor Philip Lowe is a fan of his broader mandate which comprises stable inflation, full employment and “economic prosperity”.
“It’s meant that we’ve been able to take our time in getting inflation back (to target),” he said recently. “We’re prepared to be patient.”
Grimes, however, argues that history proves monetary policy cannot have a sustained impact on employment.
“It would be like having someone who is running for health minister argue for a cancer drug to be used for heart issues,” said Grimes, who was in close contact with central bank officials from Britain as they moved to inflation targeting.
Analysts say the proposed change could lead to a higher bar for the central bank to raise rates as the RBNZ balances the need to keep inflation in check with that of securing employment growth - a trade off other central banks with dual mandates have had to grapple with.
“I had a conversation with Alan Greenspan once and he expressed envy for the fact that we had a single mandate,” Brash said. “He understands full well if the two are in conflict at some point, which one do you give priority to?”
Greenspan did not respond to requests for comment.
POLICY SINGAPORE-STYLE
NZ First also favors greater intervention in the foreign exchange market, with leader Winston Peters even touting a Singapore-style system where a currency target path replaces official interest rates and the central bank intervenes to manage currency swings.
Paul Dales, chief Australia and New Zealand economist at Capital Economics in Sydney said this would represent “a complete shake-up” of New Zealand’s monetary policy and was unlikely to materialize.
He said greater central bank intervention was also unlikely given the RBNZ is bound by its “traffic light” system which guides any intervention and that any changes “would be tantamount to political interference in the central bank”.
Instead, Labour could agree to make a mention of the exchange rate in the central bank’s policy target agreement, along with price stability and full employment.
“If they put something like that in, it would be a rhetorical win for Winston ... it wouldn’t necessarily change very much in substance at all,” said Michael Reddell, a former RBNZ official.
COT Report
Right now CFTC data on NZD doesn't bring something really special. As total net long position has dropped from all-time high, now it stands somewhere in the middle of the range and road is open in both ways. Still it is possible to make few observations here.
First is open interest - it has dropped as well. It means that downside action was triggered by long covering but not new short positions. Usually this type of action is natural for retracement but not for bear trend, when as position as open interest should grow simultaneously.
Second - new extreme of net long position. If you will take a look at historical CFTC chart of NZD, you'll see that it was in flat action since the end of 2014, when investors had little interest to kiwi dollar. As long as short peaks were far from extreme points, although open interest was high. It means that investors were balanced by keeping almost equal shorts and longs, but from summer of 2017 there was a big flow into NZD longs.
It makes us think that NZD has mostly temporal difficulties in political sphere which should not make strong impact on NZ fundamentals. As soon as they will be resolved, bullish sentiment momentum that we have on the market should support market and push it higher.
Technicals
Monthly
Technical picture also suggests some upside continuation, as major targets have not been met here.
Mostly scenario here looks bullish - trend stands bullish, price is not at OB.
NZD has tested YPP and jumped up. Market is forming clear AB-CD pattern.
This is strong resistance cluster as you can see - 0.618 AB-CD that creates Agreement with major 5/8 resistance and coincides with YPR1, which is next logical long-term destination as price already has tested YPP.
CD leg were looking strong before retracement has started .It was faster than AB and market showed tail closing mostly.
Now we have the only problem here is bearish engulfing pattern which has interrupted idyll here. Now we need to estimate whether this pattern will have far going consequences or, it mostly worked out already and kiwi is ready for new rally.
Monthly chart mostly suggests reaching of 0.77-0.78 area, but it doesn't tell when this action should start:
Weekly
On weekly picture we have clear downside AB-CD pattern as a result of monthly bearish engulfing. Here we have some discrepancies. As on monthly chart as here, on weekly, major target has not been met. Take a look that NZD has turned down and has not touched 1.618 AB-CD target. This is a sign of some external factor impact.
Now market has formed bullish engulfing right at MPS1, but slightly has not reached major weekly K-support area. As you will see from daily analysis - price has not quite completed AB=CD target.
It keeps door open for 3rd leg down, which could create some kind of 3-Drive "Buy" pattern precisely around 0.70 area. But we will know this only around target of bullish engulfing pattern.
Whatever scenario we have on weekly chart, but bullish engulfing suggests at least minor continuation up.
Daily
On a daily chart we have difficult picture for analysis and we need to pay attention to details. Initially we were suggested that market should reach 0.70 area and complete AB=CD pattern, which, in turn, should give us perfect "222" Buy for taking long position.
But market has turned up too early and this turn was rather fast. What were the reasons for that? At first glance, it seems that this was oversold and Fib level, some kind of bullish "Stretch" pattern. But if we will take careful look, then we will see that this is not quite so.
After gap down open on Monday, when OS has been reached - market didn't jump up immediately, but spent 2 days more in sideways coiling action in a very tight range with keeping gap open. Upside action has started only on Wed evening, but mostly on Thu when price already was not at oversold. It means that upside action was triggered not by technical factors.
As a result, NZD now stands at daily Overbought area. Taking both moments together, we could suggest some retracement on Monday and then upside continuation (don't forget about weekly engulfing pattern).
How far market could move? Well, as we do not have any other tools yet, harmonic swing points on ~0.7350 area. This will be key level that we've talked about higher. Around 0.7350 we will understand whether kiwi will follow up right to 0.78 target, or, we will get another leg down to 0.70 first. But this will happen not on coming week probably, so we could relax for awhile:
Intraday
Actually, guys, we have B&B "Sell" LAL (Look-alike) pattern on daily chart. LAL is because thrust down is a bit choppy. But, as market stands at OB and this is also K-resistance on 4-hour chart, it should work.
Besides, combination of daily OB and Fib levels on 4-hour chart create bearish "Stretch" pattern. This is first trading setup for coming week - retracement back to 0.71 area - 5/8 Fib support level:
All other discussion now stands secondary for us. First we will be watching what will happen around 0.71. Whether market will form some bullish pattern here. If, for example, we will get reverse H&S, then, indeed, some action to 0.73 will be possible. Otherwise, breakout of 0.71 could lead market lower, even to 0.70. Currently it difficult to foresee all scenarios.
So, let's go step by step, and first step is B&B "Sell" trade with 0.7110 target...
Conclusion:
In general as it is seemed from fundamental data, NZD has not bad long-term perspectives, at least for nearest 3-6 months. But there are some variations on daily/weekly basis in the shape of this action. Precisely speaking, whether NZD will go up to 0.78 target right now or, it will compete 0.70 target first. We should get clarity within few weeks.
Meantime, on daily/intraday charts we have clear setup for next week. This is retracement somewhere to 0.71 area.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Today, guys, I thought, it makes sense to replace gold analysis by some FX pair, just because on gold market we do not see big changes on long-term picture and daily videos will be enough to keep finger on the pulse.
At the same time we see significant changes on Kiwi dollar and it is long time passed since we've taken a look at it last time.
Fundamentals
In fact just one month ago NZD had positive perspectives and indeed, it has shown pretty nice rally. Last time we positively assessed kiwi future in long-term period, but it was a bit overextended by CFTC data
and we suggested some retracement down.
In reality overbought situation coincided with political elections in NZ and turmoil that has followed to it. Shortly speaking political rivals have got approximately equal amount of votes and this has made creating of
government rather difficult.
(Reuters) - New Zealanders will likely need to wait several more days to find out who will form the new government in the South Pacific island nation, the small nationalist party holding the balance of power said on Thursday.
The New Zealand First Party was holding a fifth day of talks with both the ruling National and the opposition Labour Party to form a coalition government, almost three weeks after an inconclusive general election.
Prime Minister Bill English’s ruling National Party won 56 seats in the Sept. 23 election, while a Labour-Green bloc have 54 seats, leaving both needing New Zealand First’s nine seats to meet the 61 seats needed for a majority in parliament.
New Zealand First leader Winston Peters said that he was “pretty confident” that those talks with the main parties would conclude on Thursday evening, but said the NZ First board would not meet to discuss its options until the weekend at the earliest.
“It depends upon the logistical availability of the board which will be Saturday, Sunday or Monday,” Peters told reporters. “I’ll know that before too long.”
Asked whether the public would know who the government is by the end of next week, Peters said yes,the Stuff.co.nz media website reported.
The political limbo has pushed the New Zealand dollar, the world’s 11th most traded currency, down by around 3.3 percent since the vote. The Kiwi was trading at $0.7103 mid-afternoon on Thursday after hitting a four-month low earlier this week.
Two recent independent surveys have suggested the uncertainty is curbing business sentiment, although official data released on Thursday indicated that consumer confidence remained robust.
There are also concerns that a government including the nationalist NZ First would lead to more interventionist economic policies. Peters fueled those fears earlier this week when he said that exporters should welcome the recent fall in the local currency.
NZ First also wants to restrict foreign investment, curb immigration and renegotiate certain trade deals.
Strong immigration has been blamed for the country’s hot housing market and unaffordable prices. Data from the Real Estate Institute of New Zealand released on Thursday showed that the number of properties sold in September was the lowest for that month for six years, as the market awaited an election result.
Peters lost his own seat in the election to a National candidate but remains the lead negotiator and eligible for a ministerial post as leader of NZ First.
He said talks so far had focused on policy, with no discussions yet on ministerial portfolios or offices.
Peters said he was aiming for a “serious consensus” from the NZ First board on which party to support, but he declined to identify or number those board members.
But this is only the half of the problem. Another half is impact on NZ Central bank, which policy principals could change vector:
Reuters: New government in New Zealand could spell changes for pioneering central bank
The formation of a center-left government in New Zealand after an inconclusive election last month would likely spell big changes for its central bank, the pioneer of the inflation-targeting regime adopted across the world.
The Labour-Green bloc has an even chance with the ruling National Party to form a government, if it can agree to a deal with the nationalist New Zealand First Party after talks this week.
For 28 years, New Zealand’s central bank has had the single aim of keeping inflation between a set range. But Labour wants to add employment to the bank‘s mandate, a goal shared by NZ First which also wants to broaden the Reserve Bank of New Zealand’s (RBNZ) focus to include greater management of the local dollar’s value against other currencies.
“It’s a huge change. We’ve had over 25 years of an extraordinarily successful monetary policy that has been copied around the world,” said Arthur Grimes, RBNZ’s chief economist in the early 1990s and Board Chair between 2003 and 2013. Any change without careful consideration and analysis would be “extraordinary”, he added.
New Zealand was first to formally grant its central bank independence and first, in 1989, to introduce an official inflation target after grappling with annual price rises as high as 18 percent during the 1980s.
Though its economy is only the world’s 53rd largest, New Zealand has earned a reputation for its economic experimentation and free market approach over the past three decades.
Its inflation targeting soon became the global economic orthodoxy.
“I don’t think people treated it terribly seriously (at first),” said Ted Truman, a former U.S. Federal Reserve official, who spent a month in New Zealand 16 years ago researching inflation targeting.
“Five or six years later it was much more respected and people flocked to New Zealand to find out how they were doing it... which is why I was there.”
Don Brash, who was governor when the inflation target was introduced, said the idea came from a TV interview with Roger Douglas, a Labour finance minister in the 1980s. Douglas was asked if he was happy with a drop in inflation to below 10 percent.
“He said: ‘No, I‘m looking at price stability like zero to 1 percent’ and that was I think the first formulation of the target in numerical terms,” Brash told Reuters.
The initial 0-2 percent target was widened in 1996 and then lifted in 2002 to its current 1-3 percent.
New Zealand’s per capita income dropped during the radical reforms of the 1980s but has since stabilized. Its employment rate has consistently out-performed other developed countries for the past decade and inflation has remained in check.
DUAL-MANDATE CLUB
Labour has said it is committed to the inflation target but wants to add the goal of full employment, bringing it in line with the likes of Australia and the United States.
Reserve Bank of Australia (RBA) Governor Philip Lowe is a fan of his broader mandate which comprises stable inflation, full employment and “economic prosperity”.
“It’s meant that we’ve been able to take our time in getting inflation back (to target),” he said recently. “We’re prepared to be patient.”
Grimes, however, argues that history proves monetary policy cannot have a sustained impact on employment.
“It would be like having someone who is running for health minister argue for a cancer drug to be used for heart issues,” said Grimes, who was in close contact with central bank officials from Britain as they moved to inflation targeting.
Analysts say the proposed change could lead to a higher bar for the central bank to raise rates as the RBNZ balances the need to keep inflation in check with that of securing employment growth - a trade off other central banks with dual mandates have had to grapple with.
“I had a conversation with Alan Greenspan once and he expressed envy for the fact that we had a single mandate,” Brash said. “He understands full well if the two are in conflict at some point, which one do you give priority to?”
Greenspan did not respond to requests for comment.
POLICY SINGAPORE-STYLE
NZ First also favors greater intervention in the foreign exchange market, with leader Winston Peters even touting a Singapore-style system where a currency target path replaces official interest rates and the central bank intervenes to manage currency swings.
Paul Dales, chief Australia and New Zealand economist at Capital Economics in Sydney said this would represent “a complete shake-up” of New Zealand’s monetary policy and was unlikely to materialize.
He said greater central bank intervention was also unlikely given the RBNZ is bound by its “traffic light” system which guides any intervention and that any changes “would be tantamount to political interference in the central bank”.
Instead, Labour could agree to make a mention of the exchange rate in the central bank’s policy target agreement, along with price stability and full employment.
“If they put something like that in, it would be a rhetorical win for Winston ... it wouldn’t necessarily change very much in substance at all,” said Michael Reddell, a former RBNZ official.
COT Report
Right now CFTC data on NZD doesn't bring something really special. As total net long position has dropped from all-time high, now it stands somewhere in the middle of the range and road is open in both ways. Still it is possible to make few observations here.
First is open interest - it has dropped as well. It means that downside action was triggered by long covering but not new short positions. Usually this type of action is natural for retracement but not for bear trend, when as position as open interest should grow simultaneously.
Second - new extreme of net long position. If you will take a look at historical CFTC chart of NZD, you'll see that it was in flat action since the end of 2014, when investors had little interest to kiwi dollar. As long as short peaks were far from extreme points, although open interest was high. It means that investors were balanced by keeping almost equal shorts and longs, but from summer of 2017 there was a big flow into NZD longs.
It makes us think that NZD has mostly temporal difficulties in political sphere which should not make strong impact on NZ fundamentals. As soon as they will be resolved, bullish sentiment momentum that we have on the market should support market and push it higher.
Technicals
Monthly
Technical picture also suggests some upside continuation, as major targets have not been met here.
Mostly scenario here looks bullish - trend stands bullish, price is not at OB.
NZD has tested YPP and jumped up. Market is forming clear AB-CD pattern.
This is strong resistance cluster as you can see - 0.618 AB-CD that creates Agreement with major 5/8 resistance and coincides with YPR1, which is next logical long-term destination as price already has tested YPP.
CD leg were looking strong before retracement has started .It was faster than AB and market showed tail closing mostly.
Now we have the only problem here is bearish engulfing pattern which has interrupted idyll here. Now we need to estimate whether this pattern will have far going consequences or, it mostly worked out already and kiwi is ready for new rally.
Monthly chart mostly suggests reaching of 0.77-0.78 area, but it doesn't tell when this action should start:
Weekly
On weekly picture we have clear downside AB-CD pattern as a result of monthly bearish engulfing. Here we have some discrepancies. As on monthly chart as here, on weekly, major target has not been met. Take a look that NZD has turned down and has not touched 1.618 AB-CD target. This is a sign of some external factor impact.
Now market has formed bullish engulfing right at MPS1, but slightly has not reached major weekly K-support area. As you will see from daily analysis - price has not quite completed AB=CD target.
It keeps door open for 3rd leg down, which could create some kind of 3-Drive "Buy" pattern precisely around 0.70 area. But we will know this only around target of bullish engulfing pattern.
Whatever scenario we have on weekly chart, but bullish engulfing suggests at least minor continuation up.
Daily
On a daily chart we have difficult picture for analysis and we need to pay attention to details. Initially we were suggested that market should reach 0.70 area and complete AB=CD pattern, which, in turn, should give us perfect "222" Buy for taking long position.
But market has turned up too early and this turn was rather fast. What were the reasons for that? At first glance, it seems that this was oversold and Fib level, some kind of bullish "Stretch" pattern. But if we will take careful look, then we will see that this is not quite so.
After gap down open on Monday, when OS has been reached - market didn't jump up immediately, but spent 2 days more in sideways coiling action in a very tight range with keeping gap open. Upside action has started only on Wed evening, but mostly on Thu when price already was not at oversold. It means that upside action was triggered not by technical factors.
As a result, NZD now stands at daily Overbought area. Taking both moments together, we could suggest some retracement on Monday and then upside continuation (don't forget about weekly engulfing pattern).
How far market could move? Well, as we do not have any other tools yet, harmonic swing points on ~0.7350 area. This will be key level that we've talked about higher. Around 0.7350 we will understand whether kiwi will follow up right to 0.78 target, or, we will get another leg down to 0.70 first. But this will happen not on coming week probably, so we could relax for awhile:
Intraday
Actually, guys, we have B&B "Sell" LAL (Look-alike) pattern on daily chart. LAL is because thrust down is a bit choppy. But, as market stands at OB and this is also K-resistance on 4-hour chart, it should work.
Besides, combination of daily OB and Fib levels on 4-hour chart create bearish "Stretch" pattern. This is first trading setup for coming week - retracement back to 0.71 area - 5/8 Fib support level:
All other discussion now stands secondary for us. First we will be watching what will happen around 0.71. Whether market will form some bullish pattern here. If, for example, we will get reverse H&S, then, indeed, some action to 0.73 will be possible. Otherwise, breakout of 0.71 could lead market lower, even to 0.70. Currently it difficult to foresee all scenarios.
So, let's go step by step, and first step is B&B "Sell" trade with 0.7110 target...
Conclusion:
In general as it is seemed from fundamental data, NZD has not bad long-term perspectives, at least for nearest 3-6 months. But there are some variations on daily/weekly basis in the shape of this action. Precisely speaking, whether NZD will go up to 0.78 target right now or, it will compete 0.70 target first. We should get clarity within few weeks.
Meantime, on daily/intraday charts we have clear setup for next week. This is retracement somewhere to 0.71 area.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
