Commodity currency pairs were battered last week as the European sovereign debt crisis continue to stir concerns about the possibility of a sharper slowdown in global growth. The NZD/USD which had been trading near their 0.8250 area in the middle of last week fell close to 600 pips reaching a low yesterday near 0.7650.

The markets showed some tepid optimism around the European debt crisis today as traders and investors were betting that European politicians got the message from the IMF and G-20 nations that they had to step up their efforts to stem their crisis which is having spill-over effects into global financial markets and the global economy.

Examining the Chart of NZD/USD

That helped give the New Zealand dollar chance to rally against the US dollar bring it above the 0.78 level, with the NZD/USD pair trading near 0.7880 at the start of NY trading.


The moves overnight have helped push the pair through its short-term 21-bar moving average, as well as the 55-bar moving average, redoubt test pitted from Friday's trading. It means the pair has also completed a 38.2% retracement of the downswing from last week's high near 0.8340 to this week's low at 0.7640.

Therefore the pair is now a crucial juncture, and if risk sentiment continues its positive tone we should be looking for a move towards the 200-period moving average, which is also the 50% retracement, and an important pivot level going back a few weeks at the 0.7980 level.

If, on the other hand, we are rejected at the 0.79 level or 0.7980 then we look for another leg downward. We are getting to overbought levels in the RSI indicator, which means that bulls are pretty strong currently, but at the same time, that the recent rally may take a breather.


From a daily time frame we can see the of 0.7980 pivot from early August more clearly, and we have a second important resistance level at 0.8115. Those become our two main targets for a move to the topside, though we do have to be careful of the 200-period moving average in their as well. In this time frame the RSI dipped below the 30 level but is now rising, meaning we were oversold in this longer-term time-frame. That suggest the rally could have some further legs though again we have to see what happens at that important resistance level we laid out in the one-hour time-frame, and really would need a sustained move past 0.82 to return to a bullish mode in the pair. A move back to the downside seems the path of least resistance but would require another hiccup in the European situation.

Fundamentals Behind the NZD

The New Zealand dollar, similar to the other commodity currencies, is beholden to risk sentiment. These last two months have seen risk sentiment decline sharply on the back of the deteriorating euro zone situation. We did have risk rally at the end of August and we have to ask the question if this period of consolidation can extend into a stronger correction. While a lot of this continues to ride on how European politicians proceed, we do still have some fundamental data to consider for the New Zealand economy on its own.

Monday's Trade Data Shows Trade Deficit

Trade data on Monday showed that New Zealand's deficit widened more than economists forecast, mainly as we saw a surge in imports. It was the first trade deficit in eight months. With commodity prices falling for a third straight month, exports were down for a fourth straight month, posting their lowest level since January.

This reflects weaker global demand. According to Bloomberg exports have now dropped 27% in August from the year after peaking in April, though they were still up 10% compared to a year ago. Imports meanwhile rose 15% in August from a year earlier led higher by crude oil, machinery, railway vehicles, sugar and electrical machinery.

This trend towards a weaker trade balance should continue as imports increase on the back of reconstruction efforts for the city of Christchurch. Also if the global economy grows at a slower pace following the summer's hectic events, it will also continue to pressure New Zealand's export sector - which makes up 30% of the country's GDP. While the annual trade surplus is running at a 17-year high, the factors can line up for a slowdown here. One of the factors to consider is that a weaker New Zealand dollar will actually help the economy as it makes New Zealand exports cheaper abroad.

Overall, if global trade slows and that means a weaker trade balance for New Zealand it would be a bearish development for New Zealand dollar.

Upcoming Events include Data on Housing & Business Climate

On Thursday we have to key releases from New Zealand a look at new building approvals - a important leading indicator for housing construction - as well as the National Bank of New Zealand business confidence index. These two reports are important as they are leading indicators, setting up our expectations for new housing investment as well as the reaction of New Zealand businesses to recent market turmoil.

Building Permits Surged in July, What Happens in August

Building permits surged 13% in the month ending July. While we don't have forecasts for August, such a large gain the previous month likely means we have more tepid gains the following month. Still, July's data was a sign of strength for the New Zealand economy, and further gains in the expectation for the housing sector will be a positive for the currency, as it means higher interest rates from the RBNZ.

From Previous Release: The latest increase, excluding apartments, is enough to confirm a positive swing in the longer-term trend, industry and labour statistics manager Kathy Connolly said. This now indicates that February was the low point in the number of homes being approved.

The picture is similar when apartments are included, but one more month of strong data will be required to confirm that these numbers have also turned, added Ms Connolly.

NBNZ Business Confidence Plunged in August, Do We See Stabilization or Further Decline

Business confidence took a steep plunge in August, falling from 47.6 to 34.4. That decline was led primarily by weaker expectations for profits, employment, investments and exports. However all of these categories still remained positive and overall business confidence is above its historical average of +7. August was a tumultuous month for global equities, and that was reflected in the survey.


What we want to see now is whether we have a further dip in the business outlook, or if things stabilize.

A disappointing reading can have short-term negative effects for the Kiwi, especially if we follow through with further gains earlier in the week in the direction of risk appetite. A positive report can focus attention on the need for interest rate increases from the RBNZ, with 82% of respondents expecting higher interest rates, which would be a positive for the Kiwi.

Nick Nasad
Chief Market Analyst