Improving Balance Sheet Favors Rise Of New Zealand Dollar

Expectations of another Fed hike later this year has kept the US dollar stronger against all the major currencies, except the Yen.

However, the US dollar has not gained much against the New Zealand dollar in the past six months. The New Zealand dollar, being a commodity currency, was expected to fall along with the decline in the commodity prices in the last few months. However, the Kiwi did not buckle.

The recently released economic data (New Zealand) was not encouraging. The inflation expectations fell to 1.63%, the lowest levels since 1994.

The Reserve Bank of New Zealand has a mandate to maintain the inflation between one and three percentage.

Secondly, the fourth-quarter (Dec, 2015) retail sales volumes only grew by 1.4% on a q-o-q basis. The analysts’ expectation was 1.5%. Finally, the recently held Fonterra dairy auction saw prices decline for the fourth time in a row to 2.8%. Dairy exports contribute a major portion of the New Zealand foreign exchange earnings.

In spite of the issues discussed above, the New Zealand dollar remains resilient. The first and the foremost reason for the strength of the Kiwi is the smaller current account deficit. The current account deficit of New Zealand has decreased from 8% of GDP in 2008 to 3.3% as of now in 2016. The prevailing deficit is lower than the historic average.

The net external debt of New Zealand is at 56% of GDP. It has fallen from 85% of GDP in 2008 and remains the lowest in 12 years. An improving balance sheet naturally favors a stronger currency. Furthermore, the roll-over risk has considerably reduced. The country’s international debt liabilities which are maturing in less than 90 days have fallen by more than half of what it was in 2008. The domestic economic momentum continues to remain stronger.

Various unresolved economic issues still exists. However, the overall improvement in the macro economic scenario over the past seven years has resulted in a stronger New Zealand dollar. The above scenario is expected to continue this year. On the other side, the economic data from the US remains mixed. Thus, the US dollar is unable to gain against the New Zealand dollar on a consistent basis.

Most analysts also believe that the commodity prices have seen a bottom at least temporarily. Moreover, the market is convinced that the US Fed will not proceed with a rate hike at least during the first-half of this year. All these factors present a genuine reason for the uptrend in the NZDUSD pair.

Technically, as shown in the image below, the New Zealand dollar has a firm weekly Fibonacci support at 0.6610. Major resistance exists at 0.7154.

The NZDUSD currency pair also has formed a bullish total harmonic pattern. A forex trader can take a long position near 0.6700 levels with stop loss below 0.6580. The target for the trade is 0.7150. On the other hand, a binary options trader should purchase a call option with March end expiry. The suggested strike price for the call option is 0.6800.