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Currency Market Analysis

Jul 14, 2020 | Currency Market Analysis

Global Themes

• Tuesday Technicals - Signals
• What the Experts Say?
• Coming up this week?

Tuesday Technicals - Signals

Daily we are presented with information that helps us make decisions on how we should proceed. Millions of lives are at stake on the road and rail networks as drivers interpret the signals in front of them. Not seeing a red light or a one-way traffic sign can have dire consequences for everyone. Therefore, signals should ideally be clear, concise, highly visible, and unambiguous so that they can be interpreted as quickly and accurately as possible.

However, signals are not always clear or simple, so it becomes necessary to look at more than one data point to ensure the appropriate decision is made. This commonly takes place in the animal kingdom. During migration, timing is crucial as traveling vast distances to get away from the cold, find food or a mate can place a species’ survival in jeopardy. If they leave too early or too late what they were hoping to find may not be there on arrival. Therefore, migratory animals will constantly be analyzing multiple pieces of information in the hope that when they decide to fly south, swim upstream or cross the Serengeti the timing is as perfect as possible.

Unfortunately, the financial markets do not have a concise road or rail signaling system, but one more like that of the animal kingdom. We need to take multiple pieces of information, analyze it all and make the decision to sell, buy or wait. The information is often difficult to interpret and sometimes divergent.

With where the markets find themselves, driven not necessarily by fundamentals but also by a pandemic and political uncertainty, the sheer amount of data to analyze and interpret can be daunting. That some of that information can result in divergent signals can make decisions even more complicated. The NZDUSD may be at such a junction. Today's chart shows some signs of divergence but whether the signals result in the end of the short to medium term upward trend of the Kiwi is not yet clear.

Divergence is when the market is moving in one direction, but the analysis tools are moving in another. This formation is often used to identify a possible change in trend. In today's chart we could be seeing the first signs that the trend could be changing as the current formation looks to be one of ‘Negative Divergence’. This is when the market makes a higher high ❶, but the RSI makes a lower high ❷. The RSI is a momentum indicator used in technical analysis that measures the magnitude of recent price changes.

What this is indicating is that although the market is going up, momentum is waning, and the move may stall and reverse.

Additionally, we also see that there has been a failure of the 100 day-MA and 200 day-MA to cross and form a ‘Golden Cross’ which would have confirmed a run higher for the Kiwi ❸.

What the Experts Say?

Westpac – “the New Zealand economy is still facing some significant challenges over the coming months. Many businesses have been left with a hole in their earnings following the lockdown in late March and April. In addition, the combination of a weak global economy, the closure of our borders and increases in unemployment will be a significant drag on demand.”

BNZ – “subdued imports and resilient primary sector export outlook is a useful offset to the sudden absence of tourism and is offering support to the NZD”

ANZ – “the RBNZ has been easing monetary policy, the NZD has ratcheted higher – leading to tighter monetary conditions than otherwise. While this partly reflects our relatively favourable COVID position and resilient commodity prices, it also reflects the recent surge in global liquidity and the fact that monetary policy here is not as loose as it could be.”

Using multiple layers of analysis to help get the most accurate read on the markets is common, but the sheer volume of USD stimulus, which seems to be main driver of the current Kiwi strength, cannot be underestimated and could very well prove too much for these indicators and the Kiwi could continue to fly.

With as much divergent information across the board at the moment, betting on red or black is extremely risky. Now may be the right time to layer FX cover over a period time and tenor, using spot, forwards, and options in an effort to protect margins and ensure price certainty.

Coming up this week?

NZ CPI data for Q2 will be released on Thursday morning with expectations of a 0.5% drop justified given the COVID and oil price turbulence that we have seen over the course of the quarter. Later in the day we will get a look at the Australian employment data for June with a slight uptick in unemployment expected which could bode well for the NZD/AUD rate given the resurgence in COVID across the ditch. With central bank meetings in the EU, Japan, and Canada unlikely to trigger big currency moves, will be keeping an eye on US equities as earning season kicks off for US banks in addition to US monthly inflation and retail sales data later in the week. The Bank of Japan is first up with no change to their elaborate QE and yield curve control policy expected. Similarly, over at the ECB president Christine Lagarde summed it up recently, “we have done so much that we have quite a bit of time to assess the incoming economic data carefully”. The NZD/CAD rate is still holding close to 12-month highs and the Bank of Canada may be able to move the dial on this cross considering it will be Tiff Macklem’s first meeting as governor.

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