What's Next For The Kiwi?

Includes: ENZL, UDN, UUP
by: Ralph Shell


The New Zealand Dollar has enjoyed a healthy advance. Wlll it last?

IMF says the Kiwi is 4% to 15% overvalued.

Energy and Resources Minister opens large blocks for energy development.

The New Zealand Dollar, otherwise known as the Kiwi, has rallied smartly, up about 650 pips between February and April 1. Since achieving the high on April 1, the NZDUSD has retreated. It is currently trading around .8540. During this period, there was significant growth in the outstanding OI. From a low of 23K contracts at the beginning of the period, it went to 33K in the last report. Money flowed into the market, expanded the total OI, and took the market higher.

During this time frame, there was continued negativity toward the other commodity currencies, and short positions were taken in the Australian and Canadian Dollars. The largest NZ exports are comprised of milk and milk products, sheep and goat meat, crude oil, butter and wool, which are all commodities. Though the Kiwi is a commodity currency, the specs bought rather than sold the Kiwi.

During this period there was also angst the Chinese slowdown would negatively impact the economies of Australia and New Zealand. Like Australia, New Zealand trade has not been hurt, so far, by the slowdown. Total February exports were up 17% to $4.6B, of which the value of the Chinese imports was about 26%.

One of the catalysts for this week's retreat was a report that the price of dairy products was down 8.9% to $4,124 a ton and this would negatively impact NZ exports. This report came one day after there was a Bloomberg report about the strong demand and price for US dairy products. Demand from China and South America for US dairy products increased by 19% to 163,000 tons in January. The value of these exports was up 35% to $583M. Considering the breath of the global demand the reduced price of cheese and dried milk may be temporary.

Still there may be a case the higher currency did hurt NZ exports, reducing demand. The Asia Pacific spokesman for the IMF Brian Aitken told reporters in Wellington:

the New Zealand dollar was still "a bit stronger" than the IMF would like it to be, estimating it was between 5% and 15% overvalued. Aitken said during last year's visit the New Zealand dollar was around 15% over valued...

There are good reasons to be optimistic about the future of New Zealand. This small country of 4.5 million people is blessed with abundant natural resources. This week it was announced NZ was opening the bidding for the development of 156,00 square miles for energy development. Bids must be submitted by September 25th. According to Energy and Resource Minister Simon Bridges:

"Oil is our fourth-largest export, with a value of around NZ$1.8 billion ($1.6 billion) in 2012, but we have barely scratched the surface of our potential," Bridges said. Only one of the country's 18 basins is in production and if one more was opened "it would be an economic game-changer," he said.

There are reports of oil seeping to the surface at numerous locations on both islands. This may be similar to oil that was, for years, found in the shale formations of North Dakota. There were oily rocks confirming the presence of oil but the industry did not know how to retrieve the oil. Finally, the technology was discovered and daily production in ND now approaches 1 million barrels per day.

The long-term outlook is indeed friendly for the NZ economy and its currency. But the long side of the NZDUSD seems too popular at the moment. Our last COT report showed speculators to be net long 20,858 contracts. This is a sizable position in a market where the total OI is only 33K. However, the bulk of the longs are the large specs who are usually better financed and are not chased from the market by random market moves.

The market does look like it has printed a temporary top but we are inclined to look for a spot to initiate new longs. The area between .8450/90 looks interesting as a place to start. As always carefully manage your money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.