Kiwi dollar weakens on decline in dairy products prices

The uncertainty caused due to general elections in the New Zealand sparked a downtrend in the NZD/USD pair. On the contrary, Trump’s reasonable success in getting the budget blueprint, which paves way for tax reforms, passed in the US Senate enabled the Greenback to strengthen against the G10 currencies.

The US dollar’s rally was also aided by a better than anticipated performance of the US economy, despite the negative effect of hurricanes Harvey and Irma. Since October 15, the NZD/USD pair has fallen from 0.7180 to 0.6810 levels.

However, in the past few trading sessions, the NZD/USD has recovered to trade at 0.6910 levels. We anticipate the downtrend to resume in the NZD/USD pair due to reasons given below.

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Earlier this week, the New Zealand Finance Minister Grant Robertson and the Reserve Bank of New Zealand signed a new Policy Targets Agreement. According to the agreement, the central bank will have a committee to decide the interest rates. Further, the committee will also take into account the employment target before deciding the interest rates. That means there is a high probability of a decline in the interest rates, which would make the currency unattractive to investors. Much of the rally in the New Zealand dollar in the aftermath of the 2008 financial crisis was due to the higher interest rates, compared to other developed economies.

The average price of dairy products fell 3.5% to $3,105 per ton in the dairy auction conducted on Tuesday. It is the third consecutive decline since October 3. A drop in the price of dairy products will have a negative impact on the Kiwi dollar as the country exports 95% of its produce.

In the US, the IBD/TIPP Economic Optimism Index reading rose to 53.6 in November, from 50.3 in the previous month, and greater than 51.2 anticipated by analysts. It is the highest recorded reading since March 2017. The reading is based on a national survey on consumer confidence.

The Bureau of Labor Statistics also reported 6.10 million job openings in September, unchanged from the earlier month, but greater than economists’ expectation of 5.98 million. The figures do not include openings in the farming sector. Thus, fundamentals favor a decline in the NZD/USD pair.

The NZD/USD pair is facing resistance at 0.6930. Further, the DeMarker indicator is making a negative divergence with the exchange rate of the NZD/USD pair. Thus, we expect another round of decline in the NZD/USD pair.

By going short in the NZD/USD pair near 0.6930, we are planning to benefit from the price decline. A stop loss order will be placed above 0.7040 to limit losses. Further, an order to book profit will also be placed near 0.6810.

Similarly, a put option may be purchased from a suitable binary broker to gain from the anticipated decline in the NZD/USD pair. The option will be bought when the pair trades near 0.6930 in the spot Forex market. Further, a date around November 18 will be selected for expiry of the contract.