17.10.201901:20 Forex Analysis & Reviews: Kiwi clipped its wings

The New Zealand dollar is not in the best mood this week. The kiwi remains under pressure despite a slight strengthening. Analysts believe the kiwi's dynamics is not too stable.

The beginning of the week was a time of strength testing for the New Zealand currency. At the start of trading, the kiwi was under pressure: after negotiations between US and Chinese trade representatives last week, and also the kiwi fell after the publication on Monday, October 14, disappointing data on Chinese exports and imports. By the middle of the week, the kiwi managed to slightly strengthen its position, analysts said. At the beginning of the European session on Tuesday, October 15, the NZD/USD pair was trading near the level of 0.6282. On Wednesday morning, the pair slightly fell, reaching a range of 0.6275-0.6276.

According to experts, the economy of New Zealand, mainly export-oriented, is adversely affected by a slowdown in the global economy and a decrease in purchases of New Zealand products by other countries. The backbone of the New Zealand economy is the agribusiness, represented by timber and agricultural complexes. The lion's share of New Zealand exports is dairy products, primarily milk powder. The share of dairy exports in the country's total exports reaches 20%. According to current forecasts, if world prices for dairy products rise, especially for milk powder, a strengthening of the New Zealand currency should be expected.

The kiwi dynamics are also influenced by the expectation of a potential reduction in the key rate by the Reserve Bank of New Zealand (RBNZ). Currently, it is close to zero, analysts emphasize. In the last month of the summer, RBNZ reduced the rate immediately by 50 bp to 1.00%. The regulator explained this decision by the escalation of the trade conflict between the US and China and the loss of momentum in the New Zealand economy. The agency believes that the weakening of global economic activity reduces the demand for goods and services from New Zealand.

The leadership of the central bank also records a weak rise in wages in the country. In a similar situation, inflationary expectations are reduced, analysts emphasize. Recent statistics indicate that New Zealand's annual GDP growth may be below 2%, although it must be 3% in order to sustainably achieve the inflation target.

A further RBNZ strategy involves easing monetary policy in the near future. Experts believe that this will put significant pressure on the kiwi. The regulator's tendency to maintain a soft policy and a high probability of rate cuts keep the NZD/USD pair in constant tension, analysts said. They tend to further pull down the pair with targets at support levels of 0.6200 and 0.6100.

The negative fundamental background creates the prerequisites for the weakening of the New Zealand dollar in the short and medium term, analysts said. They allow the pair NZD/USD to slide from current levels, but generally do not observe excessive pessimism in the pair. Analysts recommend a short position in the pair, since a long-term "bearish" trend prevails below the resistance level of 0.6560. Experts believe NZD/USD sales below the short-term resistance level of 0.6305 are quite safe. At the moment, the pair runs in the range of 0.6259–0.6260, showing downward trends, but sooner or later the kiwi hopes to spread its wings.