Seeking Alpha

NZD/CAD - More Weakness To Follow

Includes: ENZL, FXC
by: Dmitry Lifatov
Dmitry Lifatov
Gold & precious metals, research analyst

Despite a 10% decline since June 2017, NZD/CAD has still some room for a further downward movement;

The main driver of NZD/CAD weakness is a growing economic momentum in Canada and political uncertainty on the eve of the general election in New Zealand;

We suggest taking a small short position in NZD/CAD right now, which should be closed before the announcement of election results in New Zealand on September 23, 2017.

NZD/CAD is a rather interesting pair right now, offering potentially high profitability for traders, despite the fact that it has already moved down by approximately 10% since the beginning of June 2017. Nevertheless, since New Zealand and Canada are now two of the most polarized economies in terms of growth prospects, we expect the continuation of a downtrend in this pair at least till the New Zealand general election, taking place on September 23, 2017.

Political uncertainty over the outcome of this election has a strong adverse impact on Kiwi. Despite the fact that some analysts consider election risks as too "overhyped," traders will likely continue to sell the New Zealand dollar on the eve of such an important event. Without diving too deep into the details of the forthcoming vote, we only say that the rivaling parties have very different views on monetary policy issues, making it difficult to predict the probable policy of winners. You can review the main points in their election programs at New Zealand 2017 Election Factbox.

Aside from political reasons for a probable further decline, NZD/CAD has also an economic rationale explaining its weakness. The New Zealand economy faced three main challenges in August 2017: the RBNZ concerns about a higher NZD exchange rate, lower official growth forecasts for 2017 and 2018, and deteriorating values of leading macroeconomic indicators. However, all these factors are already "priced in" by traders, and we don't expect major surprises from this side.

The Canadian economy demonstrates higher-than-expected growth, with Q2 2017 GDP annualized growth rate standing at the level of 4.5%. Interest rate hike on September 6, 2017, by the BoC, also fueled the Canadian dollar rise.

From our point of view, what currently drives the NZD/CAD exchange rate are negative political factors in NZ and strong economic momentum in Canada. This will be enough to send NZD/CAD even lower, but the true watershed in its dynamics can be marked by the outcome of the general election in New Zealand.

We have discussed the current economic conditions in Canada in our previous article "CADJPY - Waiting For A Breakout," concluding that in order to continue a climb of the Canadian dollar, the economy of this country should prove a reversal in inflation downtrend and stabilization of leading macro data, which are not so bright.

The BoC by its recent rate hikes proved that the Canadian economy is strong enough to withstand a tightening of the monetary policy, while the possibility of interest rate hikes in New Zealand is looming. Now, according to investors' expectations, monetary policy tightening in New Zealand will start only in H2 2018, most probably in November 2018.

Technically, NZD/CAD has just broken below a long-term rising trend line, connecting the February 2009's and August 2015's lows on a monthly time frame, which could lead to the acceleration of a decline. Still, the September 2017's probable gains of CAD versus its New Zealand counterpart are limited, making this pair prone to major correction after a breakout of a rising trend line. We would suggest opening a small short position, which should be closed before September 23, 2017. Based on the election results, we should reassess the situation with the economic prospects of New Zealand, and probably wait for a pullback to the broken level around 0.8900-0.9000.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.