EURNZD Trade Idea (Aug, 2020)

What’s up LITA traders, we’ve got an interesting month ahead of us and I’m trying my all out best to provide you all with some fundamental analysis to keep up with the markets. The fundamental forex analysis on EURNZD will be one that’s a yellow on our traffic light system which means we’ll be adding it to our watch list and keeping an eye on the economic indicators to confirm our trades. Summary: domestic fundamentals need to be weaker for NZD and relative analysis we could do with waiting for VW gains to fall, A2 milk to continue rising and Air New Zealand to fall too.

Make sure to read our other free trade ideas after this one if you haven’t already.

I absolutely can not stress how important it is to start the analysis off with the Logikfx currency strength meter saves me so much time by allowing me to focus on just one currency pair at a time. A quick reminder the currency strength meter compiles and analyses economic reports and spits out a simple number at the end, if that number is positive it means the currency may strengthen in the future and if it’s negative it may weaken. That’s how we pair up our currency pairs on what to focus when we start analysing them on a relative basis.

Now this week we haven’t been able to pair up one strong and on weak currency but what we’ve done is pair up a pretty strong currency (EUR) at a score of +45 with NZD which last week was negative at -7 but went to +7 this week. Straight off the bat we’re going to need to wait for NZD to weaken for our idea to be truly confident, but we’re going to go ahead with the analysis to make it easy to come back and check on the strength meter to see if NZD weakens.

Standard procedure in our relative analysis phase is to checkout the GDP differentials and comparing how strong is Europe growing in comparison to New Zealand. We’ve been able to map out over the past 20 odd years the differential in blue and the EURNZD exchange rate in orange.

  You can really see how these fundamental indicators drive exchange rates. Just look at the 2008 recession, the differential spiked in favour of EUR during that period and what happened to the exchange rate? Correct, it shot up. What we’re seeing now is something similar, we had a contraction globally due to the lockdowns and pandemic but what we’re seeing now is that in 2021 the IMF are predicting a greater bounce back in Europe compared to New Zealand.

This is bullish for our trade idea for EURNZD and works nicely in our long idea. So we can tick GDP differentials off as a long bias.

What we identified from the trade analysis of imports and exports is that Europe are massive exporters of cars. Which is why we’re doing the right thing and including it in our trade analysis and more specifically we’ve picked Volkswagen because of their market dominance in Europe.

Throughout the analysis on excel we analysed a correlation of -55% meaning nearly half the time the EURNZD exchange rate would go the opposite way to VW share prices! This is a useful statistic to have because now we can make an assumption on the analysis that if the share prices fall EURNZD will go up and if they go up EURNZD will go down. On average VW grows at 0.9% based on the data but recently it spiked at 6% which isn’t great for our EURNZD long idea and is actually an indicator we’re going to wait for to fall a bit.

Ideally, we want VW share prices to drop this month and we’re also expecting this to happen as shops may face more closures meaning less sales for VW but we’ll see what governments say around the world. For now, wait for this indicator keep an eye on it and when it shows bearish signs we can tick it off in our EURNZD long idea.

Again we’ve chosen our trusty A2 Milk analysis when studying NZD behaviour because of their dominance in the dairy industry. A2 Milk is defensive in nature meaning people still need to buy milk and cheese when the economy takes a hit.

This is an interesting company to account for because there’s actually a 28% positive correlation with EURNZD. Recent data has also shown a growth of 2.73% which adds as a long bias in our system! Woop we can tick that off our analysis as ready.

A small long bias but overall people are still buying milk and that's good for EURNZD.

Air New Zealand is a new addition we’ve added to this specific currency pair, why is that? Well, Europe is not only a big exporter on cars but it also exports to New Zealand aircrafts such as helicopters and planes. So, the performance of those companies may have an impact on the exchange rate, which we’ve seen to have a -20% correlation with EURNZD.

The airline and aviation industry was one of the worst hit industries in the world with many companies now going bankrupt or filing for administration. This is a rough time for them as a whole but here we’re seeing when the AIR prices fall EURNZD goes up generally. So when COVID19 happened this march we saw AIR drop and EURNZD rise. What we’re seeing now in real time is that prices are flattening out, they’ve had a very small bounce back but they’re not looking like they’re going to recover anytime soon considering many flight restrictions.

This is currently in a neutral position but basically any negative growth in AIR prices will be a positive tick on our scoring for the EURNZD long idea. For now wait and see if these share prices to drop to confirm.

One of our final pieces of economic data is comparing interest rates and where exchange rates are likely to move. What we’ve done is plotted the interest rates differential against the exchange rate to see historically what happened. We can see that when the blue line rises the orange line follows and when the blue line falls the orange line tends to fall too.

Therefore, we can tick this off as bullish because in the last year or so interest rate differentials have continue to increase in favour of Europe. They’re still negative right now but if we see the blue line hit the positive region it will be really good for our long bias on EURNZD.

The NZX50 holds the top 50 companies in New Zealand as the holdings in the index. Generally as the index rises priced in EUR so does the EURNZD exchange rate which makes sense. What isn’t so great is that from the recent high in January on the blue line it’s dropped 5% which is bearish on EURNZD, however the prices have recovered quite a lot since then ideally we want to see the blue line break new highs to be extra confident in the idea.

Therefore, we’re putting this as amber on our traffic light system meaning we need to wait for this indicator to confirm our idea overall before we start entering trades. This is always a safe way to be strict as a trader.

Overall so far in the analysis there’s a few key points to understand:

All of our LITA traders get access to the currency strength meter in the portal so just head there to check up on NZD at the end of the week.

One of our final steps is to analyse the COT reports to come to a conclusion of market sentiment and whether the market is with our idea or against it at the moment. If you’re unsure of how to analyse the COT reports properly and make the indicator above I have a tutorial here you can follow.

Jumping into the COT indicator we can identify that the EURO is being bought by hedge funds! That’s great for our idea because this means potentially in the future overall we may see the euro continue an uptrend during the uncertain times. So we can tick that off as a long bias on our system and move on the NZD sentiment.

The NZD COT sentiment is showing the opposite, great! EURNZD long is starting to look promising. Hedge funds have continued to sell the NZD since April as it probably shows that NZD is a risk currency and with the pandemic going on it’s likely to depreciate soon!

Overall, market sentiment looks great for our idea. Just the fundamentals need a little bit of waiting right now. On a technical level we still need to see if we’re ready too so lets take a look at where price is sitting.

Here we have the weekly charts of EURNZD. Simply put, we’re in an uptrend and right now we seem to have a retrace on the uptrend for a potential long! Currently price has come down to an area of buying within the green lines.

Price right now is a little steep for me so I’m probably going to wait it out a bit and see if price can retrace back down while I wait for fundamentals to be on my side. I’ll probably wait for something below, any type of higher highs and higher lows with fundamentals being in favour of EURNZD will be great.

This is the daily outlook with the red box being the area of interest, if price can reach this level in time with fundamentals then ideally I’d like to get in here. However, you never know what will happen fundamentals may never be in our favour enough or price may just continue rising from this point on and we never get the opportunity.

So make sure to keep an eye on it! Add it to your watch list and monitor price, monitor fundamentals and monitor sentiment. We want to be an all inclusive trader and using all types of analysis in trading for the best setups.

Remember to comment below on this post any currency pairs you’d like me to analyse and I’d happily take a look. Cheers - Matty

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