The NZD/USD has lost its shine recently as milk prices have continually been falling, and the result is a touch of the trend line against the EUR/NZD. We should see a bounce lower off it and the carry trade on the interest differential will provide a second avenue for traders to profit from.
The Dairy price index has fallen a long way over the course of the year,-40.6% since Feb 4th to be precise, however, the kiwi has only really felt the strain in the last month. The Reserve Bank of New Zealand said it would pause and assess the situation before raising interest rates any further. They have raised rates a full 100 basis points since March to bring the rate to 3.50%.
By contrast the euro has taken a pummelling in every market since the european Central Bank (ECB) said it would enact stimulus. A dangerously low inflation rate,at just 0.4% at present, means we could see another round of stimulus from the ECB. At the end of last week they held interest rates at their historic lows of just 0.15% for loans and -0.10% for deposits. At the press conference ECB president Mario Draghi said he is pleased with how much the euro has fallen and said the fundamentals support this.
The euro could fall further with German CPI figures due out this week, which are expected to show inflation at just 0.3%. German economic sentiment is due this week and is expected to fall from 27.1 to 17.6. Also this week Germany and France are reporting GDP figures which are expected to show Germany contracting at -0.1% and just 0.1% growth in France in the last quarter. These figures could weigh heavily on the euro. The Kiwi has a relatively quiet week ahead with just retail sales on Wednesday to note.
The Carry trade between the two of these is another aspect that is drawing in the bears. With the interest rate differential, taking the euro short against the Kiwi will earn a very nice swap. The outlook for the carry trade is a very favourable one; with the possibility the RBNZ will resume raising interest rates with a ‘neutral rate target’ of 4.5%. The ECB is unlikely to begin to raise interest rates in the medium to long term. In fact, it could be years before we see any upward risk to EU interest rates.
The trend line is what makes this trade an opportune one. The price has twice tested the bearish trend line in the last couple of days and it appears at this stage to be holding firm. An entry can be taken below the current support to catch the downward momentum. A tight stop loss can be set for this setup because the price is so close to the trend line. A stop loss can be put in at 1.5869 to mitigate any losses from a breakout.
The longer target for this play would be the support at the low around 1.5410. This may be a little ambitious for the short term traders out there so other likely targets can be found at previous support levels such as 1.5695, 1.5613 and 1.5456.
The EUR/NZD pair is looking likely for a bounce off the trend line and a movement lower. The carry trade will also provide an extra earner for anyone bearish on this pair.