Kiwi dollar inherently weak on sagging dairy exports

For the past six months, the NZDJPY currency pair remains range bound between 72.50 and 79.40. During the period, the resilience shown by the New Zealand dollar, largely on the backdrop of a lack of further slowdown in China, its main trading partner, almost balanced the strength of the Japanese Yen, which has a reputation as a safe haven currency.

Ultimately, such a scenario tied the currency pair to a range.

However, the market largely anticipates a decline in the New Zealand dollar against the Japanese Yen due to the reasons explained below.

In Japan, the Prime Minister Shinzo Abe shelved the plan to increase sales-tax by two years. The two-stage tax rise plan was inherited by Abe from the previous government. In 2014, when the tax was increased in the first phase, the economy slumped into recession. The second stage of tax increase from 8% to 10% was to take effect in April next-year. However, due to fears of deflation, the sales tax hike has been postponed to 2019. Japan is reeling under enormous debt, which is anticipated to reach two and a half times the GDP.

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In the case of New Zealand, the Central bank took a decision to leave the interest rates unchanged this week. The main reason for taking such a decision was the rising housing prices. The Reserve Bank of New Zealand (RBNZ) is afraid that a cut in the prevailing interest rate of 2.25% would trigger a housing bubble. On the other hand, the strong Kiwi dollar has dampened the exports of dairy products, which is the main source of export income for the country. Furthermore, the country’s inflation rate of 0.4%, reported in the first-quarter, is extremely low and far off from the Central bank’s target of 2%. So, the Central bank has to take some measure to keep the rising Kiwi under check. Sooner or later, the market expects that a rate cut is inevitable. However, for the time being, the Central bank is certainly expected to take alternative measures for weakening its currency. Thus, considering the above facts, it is certain that the NZDJPY currency pair would decline soon.

The RSI reading remains below 50 for several months as of now. This indicates bearishness in the NZDJPY pair. The currency pair also continues to move within the declining channel. The next major support for the currency pair is at 71.30. The resistance to the upside is at 79.30. Considering the current scenario, it can be argued that the path to the downside has little resistance.

So, a forex broker should go short at 76.30 levels with stop loss at 78. The take profit level is 72.50 for the trade. A one touch put option would be the ideal contract, under the current scenario, for a binary trader. For a better chance of success in the trade, the target price for the trade should be chosen in the range of 73 to 74, while the expiry period should be in the first week of July.

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