Kiwi up on strong dairy prices, weak US Treasury yields

Off late the Kiwi dollar is on a tear. The currency continues to climb against its rivals despite weak inflationary pressure and retail sales data. While much of the uptrend has to do with the mildly bullish dairy prices, the mixed data from the US has also contributed to the New Zealand dollar’s rally.

The hawkish stance of the central bankers and overall improvement of the global economy have paved way for an increase in demand for riskier assets, thereby leading to a weakness in the Yen, which is traditionally considered to be a safe haven currency. Since July 17, the NZD/JPY pair had gained about 100 pips to close at 82.84 on Friday. We anticipate the uptrend to continue due to reasons mentioned below.

The average price of dairy products, which is the prime export revenue earner for New Zealand, increased to $3,387 in the auction conducted on July 18th . Correspondingly, the GDT index grew 0.2%. An increase in the dairy prices is positive for the New Zealand dollar.

Last week, the 30-year Treasury yield recorded its largest weekly decline in 3 months to 2.802%. Likewise, the 10-year Treasury yield declined 8.7 basis points to end at 2.232%. The news could strengthen the Kiwi dollar, which shares an inverse relationship with the US Treasury yields.

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Last week, the Bank of Japan left the benchmark interest rate unchanged at -0.1% at its July monetary policy meeting. The decision was widely expected. However, while keeping the 10-yr bond yield target close to zero percentage, the policy makers also postponed the anticipated time for achieving the 2% inflation target to fiscal 2019. It is the sixth postponement, after the Governor Karudo launched the asset purchase program in 2013. The central bank also mentioned that the inflationary pressure is below expectations.

The Ministry of Finance reported a decline in the trade surplus to Yen 439.91 billion, from Yen 686.47 billion in the prior year period, and below analysts’ estimates of Yen 484.7.

The unemployment rate in May reached a one-and-a-half-year high of 3.1% in May, and missed analysts’ estimates of 2.8%. In April, the unemployment rate stood at 2.8%. Thus, fundamentals support a NZD/JPY pair’s rally. The NZD/JPY pair has broken the ascending triangle. Furthermore, the currency cross continues to move along the ascending trend line. The stochastic oscillator is making higher lows. Thus, a continuation of the current rally can be expected.

To trade the uptrend, we are planning to open a long position near 82.60, with a stop loss order below 81.60. The long position will be diluted near 85.60 where the next minor resistance exists.

We also prefer to buy a call option from a binary broker to gain from the anticipated uptrend. We would invest when the NZD/JPY pair trades near 82.60. Furthermore, a time period of one week would be selected for the expiry of the option.

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