Sive Morten
Special Consultant to the FPA
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Fundamentals
The dollar rose sharply on Friday, hitting a six-week high versus the yen, after the Bank of Japan took one of its main interest rates into negative territory and U.S. gross domestic product data largely matched economists' expectations.
The BoJ said it would apply a negative interest rate of minus 0.1 percent on selected current account deposits that financial institutions hold with it, effectively charging banks interest for holding excess deposits at the central bank.
The bank said it would cut interest rates further into negative territory if necessary.
The rate cut was the latest example of policy divergence between the United States and other world central banks, said Tony Bedikian, managing director of global markets at Citizens Bank in Boston.
The Federal Reserve raised U.S. interest rates in December and signalled that it intended to tighten credit four times this year, while Japan joined the European Central Bank in cutting rates to below zero.
"That in and of itself is a dollar strengthening story," Bedikian said. "We had an outsized move because it was a little bit of a surprise with Japanese rates pulling into negative territory and capital drove into the U.S. markets and into the dollar."
U.S. GDP grew at a 0.7 percent annual rate in the fourth quarter, after a 2 percent growth in the third, but was near economists' revised predictions for economic growth.
"There's a little bit of support in today's number for the Fed raising rates," said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange in New York. "And if there's support for the Fed raising rates that's obviously dollar positive."
Higher interest rates make currencies more attractive for investors because they provide better returns.
The dollar index which tracks the dollar against six major world currencies, rose 1.1 percent to 99.586, its highest since Dec. 3.
The greenback booked gains of more than 1 percent against the euro , British pound , and Swiss franc after the GDP figures were released, moving the dollar into positive territory on the month against each currency.
The dollar rose 2.4 percent against the yen after the release of the data, reaching its highest since Dec. 18. It last traded up 1.9 percent at 121.05.
Friday's move reversed the greenback's month-long slide against the yen. It rose 0.4 percent against the yen for the month.
The Japanese currency was up more than 1.3 percent in January prior to the BoJ's rate cut announcement Thursday night.
Analysts remain bearish on the outlook of the Australian and New Zealand dollars reflecting concerns about China, falling commodities, as well as diverging monetary policy between the United States and the rest of the rich world.
A Reuters poll of 54 analysts found the Aussie dollar was expected to fall gradually to 69 U.S. cents in 12 months, from $0.7016 currently.
While the forecasts are in line with last month's views, they mostly preceded this week's wild swings as China's sharp weakening of the yuan fuelled fears of a currency war.
The Aussie has already shed three cents this week, pulling closer to a 7-year low below 69 cents set last September.
Thus the poll showed the Aussie at $0.7100 in one month, $0.7000 in three and $0.6800 in six. A poll taken today may would have found lower expectations.
So far, attractive bond yields have provided key support to the Antipodean currencies. Australia's 2-year bonds pay just under 2 percent , while its New Zealand counterpart offers 2.5 percent - eye-popping compared with near zero in Japan and the negative yields of Germany and France.
A survey of around 45 analysts also sees the New Zealand dollar slipping, but only gradually. Forecasts put it at $0.6600 in one month, $0.6400 in three, $0.6250 in six, and $0.6300 in 12 months.
Yet it has skidded more than two cents in one week to last stand at $0.6628. It lost 12 percent last year.
So, when you speak on NZD you can't just ignore Diary market. By Rabobank analysis they see some signs of stabilization but demand remains weak, especially in Emerging markets. Significant growth of major reserved currencies, i.e. EUR and USD makes export prices higher. This is solid burden for emerging countries and push them to develop domestic production.
As Rabobank analysts tell - looking back at the dairy sector in Q4 2015, we see international dairy commodity prices stabilising, but failing to show any real signs of recovery. Demand-side conditions remained characterised by improved growth in the US and the EU. Many emerging markets, however, are showing weakness in demand. Aggregate demand does appear to be expanding, but not enough to deal with recent supply volumes at anything more than bargain prices. Production growth slowed considerably in export regions, yet this was not enough to avoid a small increase in exportable surplus.
Q4 saw the world producing more milk than the market needed. While the stock overhang didn’t appear to worsen much, the need to clear product to less-high-paying regions of the world kept prices extremely low. Clearing this surplus in the face of weak buying from China and Russia has required pushing product into lower-paying markets.
“Looking forward, Rabobank expects the brakes to be applied to milk production in export regions in the first half of 2016, although this will be less dramatic and less evenly spread than we had in mind a few months ago,” according to Rabobank Dairy Senior Analyst Kevin Bellamy. At the same time, lower pricing and some improvement in income growth will foster improved buying in deficit regions. These dynamics will see excess inventories gradually eroded as 1H 2016 progresses, with stocks approaching normal by around mid-year. “Pricing pressure will still build over our forecast period, but we delayed the timing of the recovery and envisage a somewhat weaker trajectory than we had a few months prior,” says Bellamy. Together with modest growth in consumption within export regions, this will reduce exportable surpluses of new milk by 4% in 1H 2016— tightening the market somewhat during this period.
Meantime chart shows shows that NZD has turned to retracement up with a dropping prices on diary products on a background. Taking in consideration recent statement of NZ Central Bank and hints on possible further rate decreasing, makes us treat current action mostly as retracement on a way down.
CFTC data mostly confirms existing of bearish sentiment, as net short position on NZD continues to increase and it is far from it's limits. Open interest also shows growth while NZD rate is dropping:
So, fundamental data does not show any valuable support right now to NZD and mostly keeps probability of further drop at high level.
Technical
Monthly
Well, guys, initially when I saw drop on US GDP data, I thought that may be we will get subject for research on EUR, but unfortunately we don't. So, today we will take a look at NZD that has long-term interesting setup.
In huge time scale perspective (this is probably not even monthly chart), we have big AB=CD pattern. NZD has turned to downward action in summer 2014 and has not reached it's target. It means that sometime it will turn to upside action again and could hit estimated 0.92 area.
But right now we are mostly interested in another setup. It seems that upside bounce that has followed after NZD has hit oversold @ major Fib support comes to an end. NZD has formed bearish grabber on monthly chart. This is a big stuff. This pattern suggests taking out of 0.6120 lows. Taking in consideration that some stops are probably exist below it - most probable target seems Yearly Pivot Support1 @ 0.6050 area.
NZD should apply big forces to cancel this pattern, since it will have to move above it's top and currently it is difficult to imagine or better to say it is difficult to imagine what particular reasons to trigger this rally.
Another important issue here is Yearly Pivot has not been tested yet @ 0.69. This could become target after YPS1 will be hit.
That's being said, right now we mostly will rely on this grabber and it will be the focus in our following analysis.
Weekly
Trend is bearish here. Market is forming potential reversal pattern that butterfly is, but initially this pattern suggests further drop down to form a right wing. It is interesting, that butterfly target coincides with YPS1 ~ 0.6050 area.
Market right now is not at oversold, so theoretically it could continue move down in nearest weeks. Still Monday open will be near new February pivot point and NZD could try to touch it before drop will happen.
Thus, we need to take a careful look on daily and intraday chart with attempt to estimate final point of current upside retracement.
Daily
To better understand what is going on daily chart we will need two pictures. First one shows nicely looking "222" pattern, or let's call it reversal swing and AB=CD retracement after it. it doesn't matter. The fact is market stands at Agreement support. First bounce already has happened after market has touched it for the first time.
Also here you could guess the shape of reverse H&S pattern, but probably we do not have it. Mostly because there is no border between left shoulder and the head. That's why we can't draw neckline.
So, this picture tells that we could get some upward continuation still. At least "222" pattern usually triggers more significant action. From monthly grabber point of view - any upside retracement will be suitable for us until NZD stands inside last swing down, i.e. grabber's body
Second picture shows most recent action. At first glance we have DRPO "Buy" but this is not correct. Yes, by letter we have thrust, first and 2nd closes above 3x3 DMA. But. With 1st close market has hit 3/8 Fib level and this was B&B "Sell" pattern (we've traded it). Second - take a look that market has not formed comparable bottom. Close below 3x3 mostly reminds just retracement after first close above 3x3.
That's being said, maximum that we could count on here is intraday AB-CD pattern probably, not a DRPO "Buy".
4-hour
Here we could try to specify definite levels where we will be able to estimate precise direction. Action reminds weekly picture but just minor scale. Again, NZD forms upside reversal swing and AB-CD retracement after that. CD leg is fast drop but it already has been taken out by upward swing. This picture keeps valid as upside AB=CD as potential Butterfly "sell" pattern. Hence, we could get bearish context either if market will drop below 0.64 and erase both patterns or will reach their targets.
If market will drop below 0.64, then we could get bearish butterfly. As you can see picture is very similar to daily EUR one.
Oppositely bullish context will be valid. If market will take out 0.6550 top, then potential bearish butterfly will fail and chances on upside continuation will increase.
But to be honest, guys, by looking how NZD holds and behaves right now, it seems that deeper upside retracement is very probable.
At the same time, mostly we do not care what will happen - either market will move up a bit more or it will drop below 0.64. Our task is to get proper bearish entry point. And may be higher retracement would be better, since we will get better price.
Conclusion:
Long-term view on NZD currently looks bearish. As technical patterns as fundamental situation shows nothing that could support Kiwi right now or turn it up. Thus, we mostly will be looking for change to sell a rally and get bearish position.
Meantime in short-term chart NZD stands in retracement. Currently it is difficult to estimate its destination. Still we have found important levels - if they will be broken it will tell us about ending of retracement. Currently it seems that kiwi could show another leg up, at least while it stands above 0.64 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.
The dollar rose sharply on Friday, hitting a six-week high versus the yen, after the Bank of Japan took one of its main interest rates into negative territory and U.S. gross domestic product data largely matched economists' expectations.
The BoJ said it would apply a negative interest rate of minus 0.1 percent on selected current account deposits that financial institutions hold with it, effectively charging banks interest for holding excess deposits at the central bank.
The bank said it would cut interest rates further into negative territory if necessary.
The rate cut was the latest example of policy divergence between the United States and other world central banks, said Tony Bedikian, managing director of global markets at Citizens Bank in Boston.
The Federal Reserve raised U.S. interest rates in December and signalled that it intended to tighten credit four times this year, while Japan joined the European Central Bank in cutting rates to below zero.
"That in and of itself is a dollar strengthening story," Bedikian said. "We had an outsized move because it was a little bit of a surprise with Japanese rates pulling into negative territory and capital drove into the U.S. markets and into the dollar."
U.S. GDP grew at a 0.7 percent annual rate in the fourth quarter, after a 2 percent growth in the third, but was near economists' revised predictions for economic growth.
"There's a little bit of support in today's number for the Fed raising rates," said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange in New York. "And if there's support for the Fed raising rates that's obviously dollar positive."
Higher interest rates make currencies more attractive for investors because they provide better returns.
The dollar index which tracks the dollar against six major world currencies, rose 1.1 percent to 99.586, its highest since Dec. 3.
The greenback booked gains of more than 1 percent against the euro , British pound , and Swiss franc after the GDP figures were released, moving the dollar into positive territory on the month against each currency.
The dollar rose 2.4 percent against the yen after the release of the data, reaching its highest since Dec. 18. It last traded up 1.9 percent at 121.05.
Friday's move reversed the greenback's month-long slide against the yen. It rose 0.4 percent against the yen for the month.
The Japanese currency was up more than 1.3 percent in January prior to the BoJ's rate cut announcement Thursday night.
Analysts remain bearish on the outlook of the Australian and New Zealand dollars reflecting concerns about China, falling commodities, as well as diverging monetary policy between the United States and the rest of the rich world.
A Reuters poll of 54 analysts found the Aussie dollar was expected to fall gradually to 69 U.S. cents in 12 months, from $0.7016 currently.
While the forecasts are in line with last month's views, they mostly preceded this week's wild swings as China's sharp weakening of the yuan fuelled fears of a currency war.
The Aussie has already shed three cents this week, pulling closer to a 7-year low below 69 cents set last September.
Thus the poll showed the Aussie at $0.7100 in one month, $0.7000 in three and $0.6800 in six. A poll taken today may would have found lower expectations.
So far, attractive bond yields have provided key support to the Antipodean currencies. Australia's 2-year bonds pay just under 2 percent , while its New Zealand counterpart offers 2.5 percent - eye-popping compared with near zero in Japan and the negative yields of Germany and France.
A survey of around 45 analysts also sees the New Zealand dollar slipping, but only gradually. Forecasts put it at $0.6600 in one month, $0.6400 in three, $0.6250 in six, and $0.6300 in 12 months.
Yet it has skidded more than two cents in one week to last stand at $0.6628. It lost 12 percent last year.
So, when you speak on NZD you can't just ignore Diary market. By Rabobank analysis they see some signs of stabilization but demand remains weak, especially in Emerging markets. Significant growth of major reserved currencies, i.e. EUR and USD makes export prices higher. This is solid burden for emerging countries and push them to develop domestic production.
As Rabobank analysts tell - looking back at the dairy sector in Q4 2015, we see international dairy commodity prices stabilising, but failing to show any real signs of recovery. Demand-side conditions remained characterised by improved growth in the US and the EU. Many emerging markets, however, are showing weakness in demand. Aggregate demand does appear to be expanding, but not enough to deal with recent supply volumes at anything more than bargain prices. Production growth slowed considerably in export regions, yet this was not enough to avoid a small increase in exportable surplus.
Q4 saw the world producing more milk than the market needed. While the stock overhang didn’t appear to worsen much, the need to clear product to less-high-paying regions of the world kept prices extremely low. Clearing this surplus in the face of weak buying from China and Russia has required pushing product into lower-paying markets.
“Looking forward, Rabobank expects the brakes to be applied to milk production in export regions in the first half of 2016, although this will be less dramatic and less evenly spread than we had in mind a few months ago,” according to Rabobank Dairy Senior Analyst Kevin Bellamy. At the same time, lower pricing and some improvement in income growth will foster improved buying in deficit regions. These dynamics will see excess inventories gradually eroded as 1H 2016 progresses, with stocks approaching normal by around mid-year. “Pricing pressure will still build over our forecast period, but we delayed the timing of the recovery and envisage a somewhat weaker trajectory than we had a few months prior,” says Bellamy. Together with modest growth in consumption within export regions, this will reduce exportable surpluses of new milk by 4% in 1H 2016— tightening the market somewhat during this period.
Meantime chart shows shows that NZD has turned to retracement up with a dropping prices on diary products on a background. Taking in consideration recent statement of NZ Central Bank and hints on possible further rate decreasing, makes us treat current action mostly as retracement on a way down.
CFTC data mostly confirms existing of bearish sentiment, as net short position on NZD continues to increase and it is far from it's limits. Open interest also shows growth while NZD rate is dropping:
So, fundamental data does not show any valuable support right now to NZD and mostly keeps probability of further drop at high level.
Technical
Monthly
Well, guys, initially when I saw drop on US GDP data, I thought that may be we will get subject for research on EUR, but unfortunately we don't. So, today we will take a look at NZD that has long-term interesting setup.
In huge time scale perspective (this is probably not even monthly chart), we have big AB=CD pattern. NZD has turned to downward action in summer 2014 and has not reached it's target. It means that sometime it will turn to upside action again and could hit estimated 0.92 area.
But right now we are mostly interested in another setup. It seems that upside bounce that has followed after NZD has hit oversold @ major Fib support comes to an end. NZD has formed bearish grabber on monthly chart. This is a big stuff. This pattern suggests taking out of 0.6120 lows. Taking in consideration that some stops are probably exist below it - most probable target seems Yearly Pivot Support1 @ 0.6050 area.
NZD should apply big forces to cancel this pattern, since it will have to move above it's top and currently it is difficult to imagine or better to say it is difficult to imagine what particular reasons to trigger this rally.
Another important issue here is Yearly Pivot has not been tested yet @ 0.69. This could become target after YPS1 will be hit.
That's being said, right now we mostly will rely on this grabber and it will be the focus in our following analysis.
Weekly
Trend is bearish here. Market is forming potential reversal pattern that butterfly is, but initially this pattern suggests further drop down to form a right wing. It is interesting, that butterfly target coincides with YPS1 ~ 0.6050 area.
Market right now is not at oversold, so theoretically it could continue move down in nearest weeks. Still Monday open will be near new February pivot point and NZD could try to touch it before drop will happen.
Thus, we need to take a careful look on daily and intraday chart with attempt to estimate final point of current upside retracement.
Daily
To better understand what is going on daily chart we will need two pictures. First one shows nicely looking "222" pattern, or let's call it reversal swing and AB=CD retracement after it. it doesn't matter. The fact is market stands at Agreement support. First bounce already has happened after market has touched it for the first time.
Also here you could guess the shape of reverse H&S pattern, but probably we do not have it. Mostly because there is no border between left shoulder and the head. That's why we can't draw neckline.
So, this picture tells that we could get some upward continuation still. At least "222" pattern usually triggers more significant action. From monthly grabber point of view - any upside retracement will be suitable for us until NZD stands inside last swing down, i.e. grabber's body
Second picture shows most recent action. At first glance we have DRPO "Buy" but this is not correct. Yes, by letter we have thrust, first and 2nd closes above 3x3 DMA. But. With 1st close market has hit 3/8 Fib level and this was B&B "Sell" pattern (we've traded it). Second - take a look that market has not formed comparable bottom. Close below 3x3 mostly reminds just retracement after first close above 3x3.
That's being said, maximum that we could count on here is intraday AB-CD pattern probably, not a DRPO "Buy".
4-hour
Here we could try to specify definite levels where we will be able to estimate precise direction. Action reminds weekly picture but just minor scale. Again, NZD forms upside reversal swing and AB-CD retracement after that. CD leg is fast drop but it already has been taken out by upward swing. This picture keeps valid as upside AB=CD as potential Butterfly "sell" pattern. Hence, we could get bearish context either if market will drop below 0.64 and erase both patterns or will reach their targets.
If market will drop below 0.64, then we could get bearish butterfly. As you can see picture is very similar to daily EUR one.
Oppositely bullish context will be valid. If market will take out 0.6550 top, then potential bearish butterfly will fail and chances on upside continuation will increase.
But to be honest, guys, by looking how NZD holds and behaves right now, it seems that deeper upside retracement is very probable.
At the same time, mostly we do not care what will happen - either market will move up a bit more or it will drop below 0.64. Our task is to get proper bearish entry point. And may be higher retracement would be better, since we will get better price.
Conclusion:
Long-term view on NZD currently looks bearish. As technical patterns as fundamental situation shows nothing that could support Kiwi right now or turn it up. Thus, we mostly will be looking for change to sell a rally and get bearish position.
Meantime in short-term chart NZD stands in retracement. Currently it is difficult to estimate its destination. Still we have found important levels - if they will be broken it will tell us about ending of retracement. Currently it seems that kiwi could show another leg up, at least while it stands above 0.64 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.
