Kiwi dollar rallies on narrowed current account deficit

A wider than anticipated trade deficit and fall in global dairy prices weakened the New Zealand dollar against the Greenback in the first week of March.

The NZD/USD pair’s decline was also supported by lower unemployment claims and strong ISM non-manufacturing PMI in the US. The decline was so steep that the currency pair lost more than 300 pips in a matter of 10 trading days.

Now, at 0.6910, we forecast a rally in the NZD/USD pair on the basis of the details provided underneath.

According to Statistics New Zealand, the food prices increased 2.2% y-o-y in February 2017. It is the highest recorded inflation since December 2011. In the previous month, the food prices increased 1.4% on a y-o-y basis. On m-o-m basis, food prices appreciated 0.2% in February.

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Yesterday, the Stats NZ stated that the current account deficit narrowed to N$2.34 billion in the quarter ended December 2016, from N$5.03 billion in the prior quarter. The reported trade deficit was below analysts’ expectations of N$2.43 billion. It is the lowest recorded deficit in three years. A decrease in the trade deficit indicates an increase in the demand for the Kiwi dollar, which is used to import goods and services. The tourism industry of New Zealand continues to remain buoyant and is mainly responsible for the decline in the current account deficit. At the end of the latest quarter, the net international debt of New Zealand decreased to $156.5 billion, or 59.9% of GDP, from $166.1 billion, or 64.8% of GDP at the end of the quarter ended September 2016.

The US unemployment and manufacturing data indicate a firm economic recovery. However, most of the economic growth has been priced in. The Greenback would see further upside only when the Fed announces a rate hike in March, and issues an encouraging economic outlook. Additionally, the market is also awaiting Trump’s plan on infrastructure and tax reforms. Unless the market receives those much needed information, the Greenback would not appreciate further. Thus, on the basis of the details provided above, we can anticipate a short-term rally, driven by economic data, in the NZD/USD pair.

The price chart shown below indicates that the NZD/USD pair has found a strong support at 0.6910. Technically, the rising RSI oscillator points to a bullish undercurrent in the currency pair. The formation of a higher low in the price chart also supports the argument. Thus, it would be prudent to stay long in the counter at this point in time.

The probable uptrend can be traded by a Forex trader by establishing a long position near 0.6980. To safeguard account from large losses, a stop loss order below 0.6900. If the pair rises as forecasted, then the profit can be booked near 0.7140.

Traders who are active in the binary market can contemplate on the purchase of a high or above option which expires on or around March 24th . Since even a single pip can make or break a binary trade, it would be better to purchase the contract when the pair trades near the support level of 0.6980.

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