Matty Cheung
Aug 3, 20207 min
What’s up Forex Traders Matty here to discuss and analyse some interesting economic themes which could impact NZDUSD moving into August. ANZ which is the Australia and New Zealand Banking Group Limited, second-largest bank by assets in Australia mentioned a risk of NZD falling into a “double-dip” recession, with November looking like where this will likely happen.
One of the key things they mentioned was that there’s worry concern of a “W” shaped downturn and that although economic indicators may remain stable in the next couple months by November it’s likely to take a turn for the worst.
Logikfx have developed a Macro Currency Strength Meter which helps us Forex Traders determine economic strength and weakness and thus currency strength and weakness. It analyses thousands of economic reports for us so we don’t need to spend hours doing it manually. What we can identify from the currency strength meter is an interesting divergence between NZD and USD fundamentals.
We can see in the blue NZD has shown weakening fundamentals which equates to a potentially weaker future currency value, it dipped into a negative reading on 11/07/2020, ranged and dipped back again at the end of last week. Throughout this whole period however the USD fundamental value remained in a net positive region suggesting that what we should focus on potentially is a NZDUSD short going forwards.
Stop right there though! Don’t be just going ahead and trying to short the idea, we need to confirm the idea through relative analysis and seeing if the market is with us or against us so make sure to read the whole post thoroughly.
But Matty what the hell does Relative analysis even mean?! Essentially, you’re analysing one economy against another, so “relatively” you’re determining how strong or weak they are in comparison. Think of it like comparethemarket.com but you’re comparing two countries.
What we’re interested in now is the first step of relative analysis which is analysing the GDP differentials. What we’ve done is calculated that for you in the blue line and plotted it against the NZDUSD exchange rate.
What we can take from the analysis is that a general rule of thumb is when the differentials is in the positive region so above the red line it creates a long bias for this economic indicator, however, when it’s below zero what we’re seeing is that it generally shorts in the future.
The impact of COVID19 has caused havoc on most countries GDP and there’s an global downturn right now. New Zealand contracted by -1.6% but because of their handling of COVID were able to re-open parts of their economy much more quickly, in comparison US GDP growth rates dropped by -9.5% in the same period! This is why the differentials increased significantly in favour of New Zealand. Overall, creating a slight long bias for NZDUSD on this indicator alone.
Our consistent traders and readers of the Logikfx trade ideas will understand that we always include A2 Milk in our analysis when considering New Zealand. It’s one of our favourite indicators when comparing against major trade partners as Dairy products are a huge export for New Zealand so it has heavy impact on exchange rates.
We’ve analysed over 20 years of data and found a 65% negative correlation with NZDUSD and A2 Milk. This allows us to create a simple yet fundamental rule, when A2 milk increases in value NZDUSD is likely to fall and vice versa. Data has shown a 3.22% increase in A2 Milk recently which creates a slight short bias overall for our chosen stock performance in relation to currency value.
Steel & Tube Holdings Limited is a New Zealand-based company, which is engaged in the distribution, processing and fabrication of steel and allied products. One of New Zealand’s top manufacturers of these construction based products.
Unlike A2 milk we’ve identified a positive correlation when analysing over 10 years’ worth of data. You can see that both lines are highly correlated with a 68% accuracy. Therefore when STU goes down NZDUSD is likely to follow too and vice versa.
COVID19 has had a significant impact on the construction business with many businesses pausing construction and people having stay in lockdown. Therefore there’s no surprise that STU has fallen in value by 11% since last month. This is a very strong short bias for this stock performance.
West Texas Intermediate (WTI) can refer to a grade or a mix of crude oil, and/or the spot price, the futures price, or the assessed price for that oil. The reason we’ve included WTI is because of one big factor. The United States main export since 2017 has been Oil and specifically refined petroleum which starts on the supply chain from crude oil prices.
WTI Oil is categorised as a volatile asset due to energy price fluctuations and the OPEC having major control on oil prices. When trading Forex NZD is also considered a risk currency and potentially even a commodity floating currency. When we put them both together over the past 10 years there’s been at 82% positive correlation!
So, 82% of the time when oil prices fall NZDUSD falls and vice versa. Recent data has shown a 2.5% growth in oil prices which isn’t great for our overall short bias, so we’ve given it a stronger score. Ideally, we want to do is wait for oil prices to start falling as this gives us a stronger indication of NZDUSD falling too.
If you’re a conservative Forex trader then waiting for these confirmations could be an important rule to implement.
One of the most important factors when assessing currency value and future value is analysing interest rates and what’s happening with money flows.
Due to global downturns most central banks have started to reduce interest rates significantly, New Zealand is one of them which has significantly dropped their interest rates over the past 10 years. You can see in comparison to the United States New Zealand have had interest rates drop significantly. Recently in the mast 6 months the differential has started to rise.
This has given us a slight long bias on Interest rates alone. Ideally, we want interest rate differentials to be falling so if the United States increase interest rates or if New Zealand decrease their interest rates even further the differential will start to fall which may see the NZDUSD fall even further.
Overall you can see the down trend in NZDUSD and the differentials so getting in on the trend is what we want to be doing.
Finalising our stock analysis against NZDUSD is having a look at relative wealth and what we can see is that there’s a direct negative correlation between NZDUSD and NZX priced in USD. This means that as the index rises in USD value the NZDUSD is falling meaning the USD is rising in value against the NZD.
The NZX50 has been rising in value since the COVID19 pandemic, it’s managed to take minimal damage due to how New Zealand handled the virus. This allowed business to open much faster than other countries. Overall, this gave us a slight short bias on our system as the rise in stock performance may see a further decline in NZDUSD.
Now that we’ve finished the fundamental analysis side of NZDUSD we want to analyse market sentiment and then check price data.
Our Sentiment analysis is really important for when timing our trade ideas, it’s probably one of the most important steps to consider after fundamentals. What we’re going to be doing is trying to position ourselves with hedge funds positioning to make sure the markets with our idea for highest probability. If you’re unsure of how to analyse COT reports you can either become a LITA trader through our sponsorship program or learn to do it yourself here.
What we’ve seen for New Zealand is open interest falling back down a strong negative percent. This means overall hedge funds are shorting the New Zealand dollar which is great for our idea! Ideally, we want the open interest to continue falling which means more and more hedge funds are shorting.
On the flip side when assessing USD hedge fund sentiment using our COT analysis tool we can see that they’ve just gone into a net positive open interest meaning they’re now longing USD.
What does this mean on a sentimental level this week? It means hedge funds are net short NZD and net long USD which goes great for our NZDUSD short idea! We can tick that off our check list as ready.
The final part is considering price which we’ll do now and specifically what’s the volatility been like.
Using multi-timeframe analysis we’re starting from the top which is a weekly level, this is what works best with fundamental analysis and COT sentiment confluence. Clearly over the past few years NZDUSD has been in a down trend and very recently we’re seeing price retrace up to the levels of 0.68 which is a major point of resistance. In combination with a weekly trendline we can assume that NZDUSD may be starting it’s downtrend again soon. What we’ll want to do is look into the smaller time frame to see what we can identify.
The daily time frame seems to have seen sellers come in large volumes. Large bearish engulfing candles have formed and what we want to see happen is the lows highlighted get broken. Once this happens we may see the correct confirmations moving forwards to get in on the idea with a good retrace if possible.
I’ll personally be looking for that low being broken, retrace back towards the yellow lines and then any bearish signals in that area. It’s really up to you what you think will be good confirmations at that point. Just remember that patience is key.
One of the final most important steps of the analysis is to consider the volatility of NZDUSD. To do this we’re using our ATR calculator we’ve developed to get an accurate stop loss and target. We need to remember as traders we can’t be setting static stop losses like 10 pips, 100pips etc.. Our stops and targets need to be dynamic depending on how much each currency pair moves.
What we’ve calculated at the current exchange rate of 0.6595 is that there’s a rough 5.3% monthly ATR value. This equates to a stop loss of 0.6945 and a soft target of 0.5545.
On the price chart it’ll look something like this with the red line being the stop loss and the green line being the target.
Remember as currency traders you want to be managing your risk along the way which we cover in the masterclass. It can be the difference between a winning strategy and a losing strategy.
Conservative traders should be awaiting the confirmation signs I’ve outlined and be patient to not jump the gun too early.
If you want extra ideas we’ll be releasing more ideas in our premium trade ideas section here.
For the most success our LITA traders who have covered the master class will understand all the nuances I’ve outlined in the analysis.