Time To Sell The Kiwi Dollar, Now Or Never

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Includes: ENZL
by: Hao Huang

Summary

Technical indicators seem to suggest that the New Zealand Dollar is overbought.

Fundamentals appear to favors more doves than hawks.

Sentiment analysis indicates the bears might be imminent.

Kiwi dollar - Google Search

The upcoming Reserve Bank of New Zealand (RBNZ) rate decision on 10th August will play an important role in dictating the future direction of the Kiwi Dollar. At the current junction, the NZD seems to be overvalued which presents a good selling opportunity for traders. This is further supported by technical, fundamental, and sentimental analysis which I will be sharing more in the subsequent paragraphs.

Technical Analysis

From a technical perspective, the NZD/USD seems to have a difficult time breaking the critical resistance and psychological level of 0.7500 as shown in the green rectangle zone in figure 1.

Figure 1

Live stock, index, futures, Forex and Bitcoin charts on TradingView

Last's week candle did not manage to close above the 0.7500 level but instead, it formed a bearish engulfing candle which signals that a potential reversal may be happening in the coming weeks. Furthermore, technical indicators such as Relative Strength Index (RSI) and Stochastic in figure 1 are also in the overbought territories which signals that there is a high probability that NZD/USD will move south in the coming week.

Fundamental Analysis

By examining the major New Zealand (NZ)'s economic figures namely GDP annual growth, inflation, and employment change. We can presumably anticipate that the RBNZ will most likely remain its interest rate as status quo. We can see that growth is starting to lose momentum with annual GDP growth rate decreasing from 3.5% in 2016 Q3 to 2.5% in 2017 Q1 as shown in figure 2.

Figure 2

New Zealand GDP Annual Growth Rate | 1988-2017 | Data | Chart | Calendar

Furthermore, the downtick in the 2Q Consumer Price Index (CPI) as shown in figure 3 coupled with the consistent contraction in NZ employment change from 2016 Q2 to 2017 Q2 as shown in figure 4 may encourage the RBNZ to remain cautiously dovish at Thursday's meeting on 10th August.

Figure 3

New Zealand Inflation Rate | 1918-2017 | Data | Chart | Calendar | Forecast

Figure 4

New Zealand Employment Change | 1986-2017 | Data | Chart | Calendar

In addition, in the previous RBNZ rate decision on June 2017, Mr. Wheeler mentioned that “A lower NZD would help to rebalance the growth outlook towards the tradable sector”. However, this piece of information seems to have yet to be priced in which suggest the potential downside for the NZD.

Hence, all the aforementioned reasons seem to be supporting the doves instead of the hawks which further reinforce the notion of selling the NZD.

Sentimental Analysis

We can see that the net non-commercial positions (Contracts of NZD) have been increased from the previous swing low with net non-commercial positions (Contracts of NZD) of -15,006 on 18th April 2017 to an all-time high of 35,981 on 18th July 2017 in figure 5.

Figure 5

Forex COT | OANDA

Nevertheless, the net non-commercial positions (Contracts of NZD) have started to lose steam recently and it has decreased to 34,938 on 1st August from the previous swing high of 35,981. This suggests that a reversal may be unfolding and if it materialized, we might see a further potential drop in the net non-commercial positions (Contracts of NZD) and this would also be supportive for the NZD/USD to further move south.

To conclude, the analysis made from the technical, fundamental, and sentimental perspective seems to favor shorting the NZD/USD. I will be looking to short the NZD/USD. The entry price I am looking to short will be at 0.73860, with a stop loss placed at 0.75528 and a profit target of 0.68952. Furthermore, if the trade goes in plan the risk to reward ratio is approximately 1 is to 3.

Have a safe trading week ahead!

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in NZD/USD over 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.