Sive Morten
Special Consultant to the FPA
- Messages
- 18,673
Fundamentals
This week guys brings nothing important to our major markets that we mostly watch for - EUR and GBP. Overall situation stands the same there, and, to be honest, our analysis doesn't need any update by far. Actually this week was inside one on EUR.
At the same time, relative silence on major currencies lets us to take a look at some others that we're rare watching for. This week we take a look at NZD. Kiwi dollar now shows big shifts in sentiment and it strongly depends on Chinese economy from one side and Diary market frome the other. This explosive combination makes solid impact on NZD rate.
First, let's take a look at FX market in general, what has happened this week.
As Reuters reports, on Friday was big demand for safe haven currencies - JPY and CHF. The Japanese yen jumped on Friday as investors sought protection against volatile stock moves, while the greenback dipped as stocks ended a dramatic week capped by large price swings.
The yen gained despite soft domestic data and a decline in benchmark Japanese bond yields, which fell back into negative territory for the first time in more than a year.
“That suggests that there’s still demand for some insurance against extended volatility over the holiday period that’s keeping the yen better supported,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
“Markets are a bit more cautious on risk appetite, with the Japanese yen and the Swiss franc gaining,” said Lee Hardman, an FX strategist at MUFG in London.
The U.S. currency has been hurt in recent weeks by rising expectations that the Federal Reserve will pause its tightening cycle sooner than expected, or potentially harm the U.S. economy with further interest rate increases.
A partial shutdown of the U.S. federal government, trade tensions between the United States and China and complications relating to Britain’s exit from the European Union are also keeping investors cautious.
“There’s still a lot of potential risk and uncertainty out there,” said Osborne.
Both chambers of the U.S. Congress convened for only a few minutes late on Thursday, but took no steps to end the partial federal government shutdown before adjourning until next week.
Speaking on NZD there are two important driving factors stand that should make major impact on this currency. First is diary market and second one is Chinese economy conditiion. Surprisingly, but recent diary auctions show good results as orders lead to price increase on two auctions in a row.
Global dairy prices rose for just the second time in six months in a fortnightly auction held early on Wednesday. The GDT Price Index climbed 1.7 percent, with an average selling price of $2,844 per tonne, in the auction. The index rose 2.2 percent at the previous sale, according to GDT Events, after falling since May.
Source: globaldairytrade.info
Prices for whole milk powder, the most heavily traded item, were up just a touch at 0.3 percent, in contrast
with futures market expectations of 3 percent lift.
“This is likely due to tighter availability of stocks on offer compared with the previous event,” said Robert Gibson, dairy analyst at NZX.
The auction results can affect the New Zealand dollar as the dairy sector generates more than 7 percent of the nation’s gross domestic product. Next aution will take place on 2nd of January 2019 (usually it takes 2 times per month).
In long-term perspective, overal GDT index doesn't show big changes for a long time:
Source: globaldairytrade.info
It is interesting, but right after auction results, NZD has shown big, drastic change in speculative and hedgers position. By CFTC data huge amount of bearish positions have been closed:
As a result, net speculative position has turned bullish since long time while it was bearish. It was long time ago, but once NZD has reached record bearish position we've warned that situation could change. The only warning moment is abcense of new bullish positions on the market. So open interest is depressed and shows weak investors attention to this currency by far:
Source: CFTC.gov
Charting by Investing.com
Finalizing diary market topic, in recent report by Rabobank it mentions mixed background of the market. From the one point of view, Rabobank expects rising of import from China and good results of the year for New Zealand milk industry due perfect weather conditions. Among risk factors stand new rules of feed regulation in NZ and US-China trade war.
Rabobank expects NZ milk production will rise 2% for the whole 2018/2019 season. Price for major product - whole powder milk will add 100-150$ per tonne within a year, depending on region. Currently price stands around 3000$ per tone.
So, as a bottom line diary market doesn't bring any problems and negative effect on NZD value, as mostly flat market is expected on coming year.
Another topic is Chinese economy. According to recent Fathom consulting review - China economy faces downside risk at home and abroad
As Fathom reports "Annual retail sales growth in China dropped to lows not seen since 2003 in November, raising further uncertainty about the prospects for the world’s second largest economy. Last year, the authorities implemented measures aimed at curbing the growth of credit. That policy tightening appears to have weighed on economic growth this year. Domestic concerns are being exacerbated by external ones. The Chinese economy could face further headwinds from US trade policy. As things stand, the Trump administration is scheduled to increase the tariff rate applied on around $200 billion worth of imports from 10% to 25% in March. Faced with downside risks at home and abroad, policymakers in Beijing have unveiled a wave of fresh stimulus measures this year. Whether that will be enough to avoid a sharp slowdown in economic growth remains to be seen."
Technical picture guys, also doesn't exclude totally downside risk for NZD, especially on long term charts.
Technicals
Monthly
So major driving factor for NZD (excluding direct rival and strength of US dollar, of course) is situation in Chinese economy. This is important consumer and importer of NZD diary products. As Fathom sees signs of weakness, technically it could lead to appearing of butterfly pattern on monthly chart and its agreement with all time major 5/8 Fib support. Potentially this will create strong bullish setup as we've got huge "222" Buy pattern here, right at major support, but its still a long time till the moment when this will happen.
Softer and more friendly situation in China, could lead to earlier upside reversal by, say, minor "222" Buy instead of butterfly pattern. For example, around YPS1 of 0.6274 area.
Right now trend stands bearish and market is not at oversold. Another pure technical moments that support idea of butterfly - existence of major AB-CD pattern and untouched COP target which coincides with butterfly target. AB leg sell-off was rather fast, and as a rule, in such circumstances market hits COP targets. Besides, BC leg doesn't look like upside trend continuation and mostly shows signs of retracement action.
So, on monthly chart NZD stands moderately bearish and depth of downside continuation depends on China economy and dollar strength as demand for safe haven could increase due tricky global political situation and processes. November jump, as we've estimated stands due massive short covering and has no support from new bullish positions in NZD.
Weekly
Weekly trend stands bullish, now market shows downside reaction on strong resistance of K-area and OB level. Here is two possible ways of action. Either we will get upside compounded action of AB-CD shape and, potentially "222" Sell pattern. Or, NZD will continue dropping to next XOP target of 0.6180 which stands close to YPS1, which is just 100 pips above. To answer on this question - we need to see what response market will show on important Fib levels. For example, breaking of major 5/8 support on daily plays for second scenario and vice versa.
Daily
This time frame brings no clear patterns, but still we could make some conclusions on possible market action here. Daily trend stands bearish, market is neither OB nor OS. As you can see on the chart market has formed upside reversal swing first and now is forming downside one of less scale. Common practice suggests that market shows deep retracement after reversal swing, just due previous opposite momentum. Thus, as NZD has broken daily K-support, it means that it stands with this deep downside retracement. It means that within 1-2 weeks we could expect reaching of major 5/8 support around 0.6630 area.
Depending what will happen then - we update our weekly analysis. Either it will be upside reversal and two leg AB-CD action, or downside continuation.
Meantime, downside reversal swing also suggests deep upside retracement, but of smaller scale. It means shape of action to 0.6630 also could become AB-CD pattern.
Intraday
Here we have mostly completed AB=CD pattern. Thus as we speak mostly about deep retracement, it means that our primary level is 5/8 @0.6860 area, or at least 0.68 K-resistance. Then we expect downside continuation, to XOP target, according to daily analysis. As soon as this tactical action will be completed - we take a look at higher time frame scale and try to estimate whether another leg up will happen on weekly chart or not:
Conclusion:
NZD analysis shows weak interest among investors to this currency, which put under question long-term bullish reversal (at least right now). External factors also mostly stands negative - Chinese economy stands under risk of slow down, difficult global political situation supports demand on safe haven currencies and assets, while situation on diary market mostly stands flat and doesn't provide any perceptible supportive effect to NZD.
Technically, market keeps long term situation dual. It means that we need to see response on major levels on weekly chart. Meantime, in short-term perspective we're watching for upside pullback, approximately to 0.6860 area and downside continuation to 0.6630. This action should complete tactical setup that we have.
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.
This week guys brings nothing important to our major markets that we mostly watch for - EUR and GBP. Overall situation stands the same there, and, to be honest, our analysis doesn't need any update by far. Actually this week was inside one on EUR.
At the same time, relative silence on major currencies lets us to take a look at some others that we're rare watching for. This week we take a look at NZD. Kiwi dollar now shows big shifts in sentiment and it strongly depends on Chinese economy from one side and Diary market frome the other. This explosive combination makes solid impact on NZD rate.
First, let's take a look at FX market in general, what has happened this week.
As Reuters reports, on Friday was big demand for safe haven currencies - JPY and CHF. The Japanese yen jumped on Friday as investors sought protection against volatile stock moves, while the greenback dipped as stocks ended a dramatic week capped by large price swings.
The yen gained despite soft domestic data and a decline in benchmark Japanese bond yields, which fell back into negative territory for the first time in more than a year.
“That suggests that there’s still demand for some insurance against extended volatility over the holiday period that’s keeping the yen better supported,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
“Markets are a bit more cautious on risk appetite, with the Japanese yen and the Swiss franc gaining,” said Lee Hardman, an FX strategist at MUFG in London.
The U.S. currency has been hurt in recent weeks by rising expectations that the Federal Reserve will pause its tightening cycle sooner than expected, or potentially harm the U.S. economy with further interest rate increases.
A partial shutdown of the U.S. federal government, trade tensions between the United States and China and complications relating to Britain’s exit from the European Union are also keeping investors cautious.
“There’s still a lot of potential risk and uncertainty out there,” said Osborne.
Both chambers of the U.S. Congress convened for only a few minutes late on Thursday, but took no steps to end the partial federal government shutdown before adjourning until next week.
Speaking on NZD there are two important driving factors stand that should make major impact on this currency. First is diary market and second one is Chinese economy conditiion. Surprisingly, but recent diary auctions show good results as orders lead to price increase on two auctions in a row.
Global dairy prices rose for just the second time in six months in a fortnightly auction held early on Wednesday. The GDT Price Index climbed 1.7 percent, with an average selling price of $2,844 per tonne, in the auction. The index rose 2.2 percent at the previous sale, according to GDT Events, after falling since May.
Source: globaldairytrade.info
Prices for whole milk powder, the most heavily traded item, were up just a touch at 0.3 percent, in contrast
with futures market expectations of 3 percent lift.
“This is likely due to tighter availability of stocks on offer compared with the previous event,” said Robert Gibson, dairy analyst at NZX.
The auction results can affect the New Zealand dollar as the dairy sector generates more than 7 percent of the nation’s gross domestic product. Next aution will take place on 2nd of January 2019 (usually it takes 2 times per month).
In long-term perspective, overal GDT index doesn't show big changes for a long time:
Source: globaldairytrade.info
It is interesting, but right after auction results, NZD has shown big, drastic change in speculative and hedgers position. By CFTC data huge amount of bearish positions have been closed:
As a result, net speculative position has turned bullish since long time while it was bearish. It was long time ago, but once NZD has reached record bearish position we've warned that situation could change. The only warning moment is abcense of new bullish positions on the market. So open interest is depressed and shows weak investors attention to this currency by far:
Source: CFTC.gov
Charting by Investing.com
Finalizing diary market topic, in recent report by Rabobank it mentions mixed background of the market. From the one point of view, Rabobank expects rising of import from China and good results of the year for New Zealand milk industry due perfect weather conditions. Among risk factors stand new rules of feed regulation in NZ and US-China trade war.
Rabobank expects NZ milk production will rise 2% for the whole 2018/2019 season. Price for major product - whole powder milk will add 100-150$ per tonne within a year, depending on region. Currently price stands around 3000$ per tone.
So, as a bottom line diary market doesn't bring any problems and negative effect on NZD value, as mostly flat market is expected on coming year.
Another topic is Chinese economy. According to recent Fathom consulting review - China economy faces downside risk at home and abroad
As Fathom reports "Annual retail sales growth in China dropped to lows not seen since 2003 in November, raising further uncertainty about the prospects for the world’s second largest economy. Last year, the authorities implemented measures aimed at curbing the growth of credit. That policy tightening appears to have weighed on economic growth this year. Domestic concerns are being exacerbated by external ones. The Chinese economy could face further headwinds from US trade policy. As things stand, the Trump administration is scheduled to increase the tariff rate applied on around $200 billion worth of imports from 10% to 25% in March. Faced with downside risks at home and abroad, policymakers in Beijing have unveiled a wave of fresh stimulus measures this year. Whether that will be enough to avoid a sharp slowdown in economic growth remains to be seen."
Technical picture guys, also doesn't exclude totally downside risk for NZD, especially on long term charts.
Technicals
Monthly
So major driving factor for NZD (excluding direct rival and strength of US dollar, of course) is situation in Chinese economy. This is important consumer and importer of NZD diary products. As Fathom sees signs of weakness, technically it could lead to appearing of butterfly pattern on monthly chart and its agreement with all time major 5/8 Fib support. Potentially this will create strong bullish setup as we've got huge "222" Buy pattern here, right at major support, but its still a long time till the moment when this will happen.
Softer and more friendly situation in China, could lead to earlier upside reversal by, say, minor "222" Buy instead of butterfly pattern. For example, around YPS1 of 0.6274 area.
Right now trend stands bearish and market is not at oversold. Another pure technical moments that support idea of butterfly - existence of major AB-CD pattern and untouched COP target which coincides with butterfly target. AB leg sell-off was rather fast, and as a rule, in such circumstances market hits COP targets. Besides, BC leg doesn't look like upside trend continuation and mostly shows signs of retracement action.
So, on monthly chart NZD stands moderately bearish and depth of downside continuation depends on China economy and dollar strength as demand for safe haven could increase due tricky global political situation and processes. November jump, as we've estimated stands due massive short covering and has no support from new bullish positions in NZD.
Weekly
Weekly trend stands bullish, now market shows downside reaction on strong resistance of K-area and OB level. Here is two possible ways of action. Either we will get upside compounded action of AB-CD shape and, potentially "222" Sell pattern. Or, NZD will continue dropping to next XOP target of 0.6180 which stands close to YPS1, which is just 100 pips above. To answer on this question - we need to see what response market will show on important Fib levels. For example, breaking of major 5/8 support on daily plays for second scenario and vice versa.
Daily
This time frame brings no clear patterns, but still we could make some conclusions on possible market action here. Daily trend stands bearish, market is neither OB nor OS. As you can see on the chart market has formed upside reversal swing first and now is forming downside one of less scale. Common practice suggests that market shows deep retracement after reversal swing, just due previous opposite momentum. Thus, as NZD has broken daily K-support, it means that it stands with this deep downside retracement. It means that within 1-2 weeks we could expect reaching of major 5/8 support around 0.6630 area.
Depending what will happen then - we update our weekly analysis. Either it will be upside reversal and two leg AB-CD action, or downside continuation.
Meantime, downside reversal swing also suggests deep upside retracement, but of smaller scale. It means shape of action to 0.6630 also could become AB-CD pattern.
Intraday
Here we have mostly completed AB=CD pattern. Thus as we speak mostly about deep retracement, it means that our primary level is 5/8 @0.6860 area, or at least 0.68 K-resistance. Then we expect downside continuation, to XOP target, according to daily analysis. As soon as this tactical action will be completed - we take a look at higher time frame scale and try to estimate whether another leg up will happen on weekly chart or not:
Conclusion:
NZD analysis shows weak interest among investors to this currency, which put under question long-term bullish reversal (at least right now). External factors also mostly stands negative - Chinese economy stands under risk of slow down, difficult global political situation supports demand on safe haven currencies and assets, while situation on diary market mostly stands flat and doesn't provide any perceptible supportive effect to NZD.
Technically, market keeps long term situation dual. It means that we need to see response on major levels on weekly chart. Meantime, in short-term perspective we're watching for upside pullback, approximately to 0.6860 area and downside continuation to 0.6630. This action should complete tactical setup that we have.
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.
. Let's take a look what's going on there. Wow, flash crash on Asian-Pacific currencies - 
