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Low unemployment, rise in dairy prices turn Kiwi bullish

In the last week of April, strong current account surplus and higher than anticipated flash manufacturing PMI reading pushed the Euro dollar higher against the US dollar and other major currencies.

The rally was notably strong against the New Zealand dollar, a commodity currency.

The EUR/NZD pair reached a high of 1.5940, from a low of 1.5215 in a matter of ten days. The optimism surrounding the probable victory of pro-EU leader Emmanuel Macron in the French election also contributed to the steep rise of the Euro.

However, it should be remembered that economic data (GDP and wage growth, unemployment rate and inflation, etc.) ultimately determines the strength of a currency. In this regard, we anticipate a short-term correction in the EUR/NZD pair as explained below.

Brookings Institution

The Euro zone unemployment rate edged lower to 9.5% in March 2017, compared with 10.2% a year earlier. However, the figures reported by Eurostat were higher than analysts’ expectation of 9.4%, but unchanged from the previous month. The Czech Republic and Germany have the lowest unemployment rate of 3.2% and 3.9%, respectively. On the contrary, Greece and Spain reported the highest unemployment rate of 23.5% and 18.2%, respectively.

While the Euro zone is suffering from high unemployment rate, New Zealand is nearing full employment. According to Statistics New Zealand, the unemployment rate declined to 4.9% in the March quarter, compared to 5.2% in the previous quarter. The market had expected an unemployment rate of 5.1%. The unemployment rate among men fell to a nine year low of 4.2%.

The number of employed people increased 1.2% to 29,000 in the March 2017 quarter. Furthermore, employment growth exceeded growth in the working age population (0.7%) for the sixth month in a row.

The average price of dairy products increased to $3,166 per ton in the auction conducted in New Zealand on Tuesday. Accordingly, the GDT index gained 3.6% on m-o-m basis. This is the fourth consecutive month of increase in the dairy product prices.

Thus, strong employment data and rise in dairy product prices are expected to turn the Kiwi dollar stronger against the Euro.

A bearish swan pattern is seen in the chart of EUR/NZD pair, as shown below. The price chart also indicates firm resistance at 1.5850. Thus, we can expect the downtrend to extend to a level of 1.5500.

EUR/NZD Pair: May 4th 2017

EUR/NZD Pair: May 4th 2017

On the basis of the forecast, a currency trader can create a short position in the EUR/NZD pair at or above 1.5810. To limit risk, a stop loss order can be placed above 1.5910. The short position can be winded near 1.5500.

A binary trader can invest in a low or below option to generate profit from the impending downtrend. The investment can be made when the pair trades near 1.5840. It is also advisable to trade a contract which expires on or around May 12th .

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