Kiwi dollar shrug off its Monday blues, trading back within the multi-year rising channel today and gaining 0.89% against the greenback. This movement is unparalleled amongst other major currency, with JPY coming the closest at 0.65% higher against USD. Most other currencies are within 0.1 – 0.3% stronger against USD, while EUR bucked the trend at -0.18% weaker. This implies that a part of NZD/USD rally today can be attributed to the weakening of USD, but a large part of the rally is NZD’s own idiosyncrasy and not related to the broad trend.
With no major news released today, the only major catalyst that could result in the additional rally seen today can only be related to the China ban of NZ and AUS dairy exports. Prices rallied not because China has removed the ban, but rather there is hint of overreaction yesterday. It seems that we were simply riding on last week’s bearishness which rose from the 0.81 rejection and invalidated the Three White Soldiers pattern which allowed price to breakout of the support channel 2 weeks ago. As we ended last week on a bearish note, it make sense to think that the sharp 100 pips drop on open yesterday has a component of opportunistic speculators looking to sell to begin with, thus driving NZD/USD lower than the “proper equilibrium”. Hence, today’s recovery can be interpreted as a standard pullback, also known as “filling the gap” price action, commonly seen when the gap was created on extreme speculative action.
However, it seems that we may be seeing bullish overreaction right now, as prices are actually trading above last Friday’s closing levels. This makes sense if we consider that AUD/USD had rallied strongly today following RBA’s rate cut today. Just as how yesterday’s sell-off in Kiwi resulted in collateral bearish trend in Aussie, the current Aussie rally has a similar impact on NZD, dragging NZD/USD higher. The fact that USD is weakening provided more scope for NZD/USD bulls to exploit, allowing price to trade back within the multi-year channel support once more.
If the above assertions are true, then the chance of price hitting Channel Top would be slimmer. Stochastic readings are also pointing lower, with readings almost crossing the Signal line. Considering that multi-year Channel levels tended not be very precise, there remains a chance that current “breaking” into the Channel may actually false, and may actually be in fact still below the Channel Bottom resistance zone. As such, prudence is definitely preferred especially since this movement has certain elements of bullish overreaction.
Short-term chart agrees as well. Even though we’ve cleared the 0.785 resistance, which opens up a potential 50 pips move towards 0.79 – 0.791, prices may find it hard to break the aforementioned resistance band which happens to be the confluence with overhead Kumo with Stochastic readings showing deep Overbought. Given that readings are still pointing up, it seems reasonable to assume that current bullish momentum has yet to cease, which is what price action is telling us as well. This agrees with the scenario where price will move towards 0.79 but ultimately failed to move further up, which will keep the downtrend in play and hence reaffirming what has been said during the Weekly Chart analysis above.
Getting back to the milk ban by China. Will it have long-term economic impact on NZ’s economy? Daily products account for slightly more than 30% of all commodities exports in 2012. While China is the 2nd largest destination for New Zealand exports, coming after neighboring Australia. Since the saga, numerous Ministers have came out to comment on the matter, with Prime Minister Keys, Finance Minister English and Trade Minister Groser basically upping their defensive game, saying that this ban will not have a significant impact in New Zealand’s GDP. Time will tell whether these leaders are correct, but the fact that we have the top 3 Ministers of New Zealand commenting on this issue is a sign that this problem is a big one.