The New Zealand dollar has declined steadily since its peak in July around 0.756 area and more rapidly after it failed to test the July high in September and peaked around 0.745 area against the USD. The kiwi cleared an important support around 0.7 area after news broke out that there is going to be a change in the country’s governance after more than eight years as Labour Party leader Jacinda Ardern became Prime Minister in a coalition government. As of latest, the Kiwi dollar has found support 0.685 area, which has given support to the pair twice before as can be seen in the chart.
However, our calculations suggest that more pain could be in store for the kiwi dollar as the pair (NZD/USD) might decline towards 0.64 area, with an interim stop at 0.658 area.
We expect, the RBNZ to continue its dovish bias in the monetary policy and the yield spread suggests that unless RBNZ revises its dovish rhetoric, the kiwi remains overvalued in terms of relative yield. In addition to that, data are not being kind to the pair. The dairy, which is the single biggest commodity exports of New Zealand saw the price declining for a third consecutive fortnight and by 3.5 percent, which is the biggest decline March this year.
While Kiwi is likely to remain dovish, there are two possible scenarios for further price decline,
- Sell breakout: in this case, kiwi breaks below 0.685 support area and plunges rapidly. In this case, we recommend taking positions after a breakout.
- Sell Resistance: Since the kiwi has declined more than 600 pips since September; a correction is due and before a break kiwi moves higher. In this case, we would recommend selling slightly above or close to 0.70 area.