NZD/CAD: I'm Buying The Pullback

| About: iShares MSCI (EWA)

Summary

The kiwi dollar has begun rebounding after a brief decline.

Weak economic data from Canada has sent the loonie to a 7-month low.

I am long NZD and short CAD.

In spite of a recent decline, the Kiwi dollar has been one of the best-performing currencies this year. In previous articles, I had asserted that as a result of relatively stronger economic growth and a rise in soft commodity prices, New Zealand had seen relatively better trade than Australia as a result of rising milk prices. Moreover, the Reserve Bank of New Zealand continues to maintain the cash rate at a relatively higher 2 percent compared to that of the United States and Europe.

However, the past month has seen a significant reversal in the NZD. For instance, we see that while the currency has risen overall against the loonie this year, we have seen a reversal from a high of 0.975 to just under 0.93, with a subsequent rebound to 0.9531 at the time of writing:

Click to enlarge

For the past month, the NZD has undergone significant weakness. Due to profit-taking on the long-term trend in addition to positive inflation data coming from the United States, we saw the US dollar trend higher while the kiwi gradually declined. However, we are now seeing a situation where the US dollar has now declined as uncertainty remains on how the Federal Reserve will move in terms of raising interest rates. Therefore, I expect the kiwi dollar to resume its ascent as investors flock back to currencies with higher cash rates.

So, why am I shorting the CAD? Over the past 5-day period, the Canadian dollar has been the weakest among all the major currencies. Much of this stems from weaker than expected economic data increasing the expectation that a further interest rate cut will be made, and this was coincided with lower oil prices which has also hit the loonie. Therefore, I see the CAD as a strong sell at this time.

In this regard, here is how I am trading a long NZD/CAD pair:

Stop Loss: 0.94653

Entry Price: 0.95363

Take Profit: 0.96753

I am long NZD/CAD and see a risk-reward ratio of 1:2 as being quite achievable on the basis of both technicals and relevant market data.

Disclosure: I am/we are long NZD/CAD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please note that foreign exchange is a rapidly moving market, and the above analysis reflects the author's opinion at the time of writing only. The author's stated views/positions should not be taken as any form of investment advice, and the author may subsequently modify his views/positions on the basis of new information.