New Zealand dollar to fall on low inflation concerns

The outcome of two surveys indicating a lead for the ‘Remain’ campaign triggered a rally not only in the Pound but also in other risky assets such as the Aussie and the Kiwi dollar.

The past three days saw the New Zealand dollar rally 150 pips to hit a one year high of 0.7299 against the US dollar.

However, under the current circumstances, the adage “buy the rumours, sell the news” may prove right in the upcoming days mainly due to the two reasons explained below.

If the result of the EU referendum is in favour of the ‘Remain’ campaign, then a strong uptrend in the Pound can be expected. In other words, the investors will no longer remain tied to safe haven currencies (Yen) and other traditionally risky commodity currencies (AUD, NZD, etc.). As investors reduce their exposure to other assets in favour of the Pound and the Euro, the New Zealand dollar will weaken against all the major currencies including the US dollar. Sheldon Slabbert of CMC Markets expressed a similar view. Slabbert stated that the New Zealand dollar could fall sharply if the outcome of the EU referendum is in favour of the ‘Remain’ campaign.

The Nation

The uptrend in the New Zealand dollar is also supported by the market’s perception that the Fed will not attempt a rate hike any time near. Any hint of hike in July would reverse the NZDUSD trend. Furthermore, it should be noted that New Zealand’s dairy sector, the major export revenue earner, is currently in dire problem because of high exchange rates. Even an increase in the immigration levels, historically low interest rate of 2.25%, and strong construction activity has done little to prop up the inflation rate. The inflation expectations for the year have fallen to 1.39% from the prior forecast of 1.64%. The New Zealand dollar cannot stay strong for a long-time without any increase in the inflationary pressure.

Earlier on Monday, a survey report showed that the consumer confidence in New Zealand has declined in the second-quarter of 2016. The Westpac-McDermott Miller consumer confidence index reading declined to 106 in June, from 109.6 reported in the first-quarter. Thus, considering the above factors, fundamentally, a trader should remain bearish on the NZDUSD pair.

The NZDUSD currency pair is expected to face a lot of resistance at 0.7280, as shown in the chart. Both RSI and stochastic indicators reveal a perfectly overbought scenario. Thus, we can expect the currency pair to decline until the next support at 0.6750.

Under these circumstances, a currency trader should go short without any dilemma. A stop loss order can be placed above 0.7450. A trader should consider closing the short position when the price falls below 0.6850.

A binary trader should trade a one touch put option contract through a suitable broker to profit from the probable decline. The target level for the put option trade should be preferably 0.7060 or higher. With a contract expiry period of one month, the likelihood of ending the trade in the money is higher.