This text is from blog famous currency strategist Joel Kruger .
UNJUSTIFIED – A lot of the focus in recent sessions has been on the outperformance in the New Zealand Dollar. Many market participants have found comfort in this currency given its still relatively attractive yield, and alternative option to what has been a less enticing Australian Dollar of late. Still, the gains in Kiwi have been somewhat perplexing in my opinion, as I believe this relative outperformance is fairly unjustified. While it is true (for all of your real short-termers) that overnight data was encouraging to account for today’s strength, data over the past several days has been nothing to brag about (and local data is really not a driver anyway), and yet, Kiwi is the strongest performing currency over the past week.
WINNER BY DEFAULT – When you break it down, Kiwi is predominantly thrown into a basket of the major commodity bloc currencies, also including the Australian and Canadian Dollars. From a yield differential perspective, Kiwi sits in the middle, carrying a more attractive yield than the Canadian Dollar, but lower yield than its Aussie cousin. But at the end of the day, to think that in the face of Aussie and Cad weakness, the New Zealand Dollar can shoulder the responsibility of acting as the major beneficiary of yield plays on the commodity bloc is ridiculous. New Zealand is by far the smallest and least sophisticated economy of the three, and you can bet that in a time of global currency wars where each country is fighting to effectively devalue its currency, New Zealand will not want to be left (nor will it be capable) of losing this war.
MAJOR KIWI SHORT AROUND THE CORNER – If the Australian and Canadian Dollars are already heading for the exits (and I contend they are), don’t think for one second that the New Zealand Dollar won’t be right there with the them. So for all of you bulls out there, go ahead and enjoy this alternative yield play for another day or two, because that’s about all the time you have left. Technically, the 0.8500 psychological barrier has acted as a formidable resistance point over the past 12 months, with multiple attempts to establish above having failed on each occasion. At this point, I would not rule out the possibility of a break above the 0.8500 figure so these obvious buy-stops can be cleared, but once cleared, look out below. As a side note, it will be worth keeping GBP/NZD on your radar over the coming days. This cross rate sits by fresh record lows, and will be a very strong candidate for a major bullish reversal soon enough. My portfolio has been pretty quiet of late, but I would be very excited with the prospect of adding some short Kiwi exposure when the opportunity presents.
