Europe recently hit inflation rates of 5% suggesting the monetary and fiscal stimulus may start overheating the economy. However, the surging cases of Omicron have caused concern as governments across the EU have had to tighten restrictions, enforce lockdowns and social distancing.
These early signs in combinations with slowing employment expectations and economic health are potentially signals of a bearish Euro in the making.
One of the largest constraints causing a dip in the economy is the supply chain issues across Germany... since Germany has a large factory sector these bottlenecks are hurting exports across the country such as vehicles, vehicle parts and other large exports.
Overall, the technology summary is showing a bearish sign for EUR/NZD we're seeing the currency strength meter, Interest rate differentials and hedge fund positions starting to deviate bearishly.
What we'll need to do is a further investigation into the relative analysis so imports/ exports to see which direction data is suggesting.
Macro currency strength meter
The macro currency strength meter helps gauge what the domestic economic reports are saying about a country and thus potentially it's currency strength. The data that's been released over the past few weeks/ months is clearly bearish.
Europe data has seen the currency strength meter for EUR go from a high positive strength down to the negative regions and vice versa for NZD.
This deviation suggests EUR is weakening and NZD is strengthening creating a bearish fundamental outlook on EURNZD.
The GDP differentials show the comparison between Europe's and New Zealand's growth rates, in this case both are heading down. What we have identified is the gap between the growth rates tightening meaning Europe's actually falling a a greater pace than New Zealand.
This is bearish for EUR/NZD as it potentially suggests a downwards trajectory on the EUR... if we see a case like the data showing between 2010-2012 a downwards trend may be on the horizon.
Trade Analysis (Import/Exports)
We've taken a look into the data of A2 Milk vs EURNZD as dairy products are a huge export in New Zealand.
Surprisingly, EURNZD has a positive correlation against A2 milk over the past 10 or so years which has shown the relationship hold true specifically between 2017 to 2022.
A2 milk has had a huge dip in prices since early 2020 and has not recovered even heading downwards further.
This fall in prices for A2 with the positive correlation suggests EUR/NZD may be in a current correction for a further downwards trend.
Air New Zealand (AIR) was another company chosen to analyse against the EUR/NZD exchange rate to compare the affects a large transportation company has on exchange rates. Over the past 10 years we've seen a negative correlation take place with current AIR prices congesting and rising from last month.
Overall, this is only slightly bearish for EURNZD whereas A2 Milk had a much stronger conviction...
Lets take a look at the final company to analyse which is VW.
Volkswagen (VW) prices were analysed against EUR/NZD as VW is a huge exporter of vehicles across the world. In this case the charts look fairly noisy however, we've identified a strong negative correlation between VW and EURNZD.
This correlation can be seen holding true at the start of 2020 where VW prices fell but recovered significantly towards 2021. During this same period EURNZD saw prices dip at a similar rate.
Overall... the trade analysis shows further bearish signs which supports the currency strength meter's outlook on the exchange rates.
Interest Rate Differentials
The interest rate differentials have been fairly stale the past few years with both European interest rates and New Zealand either holding zero rates or very low interest rates. Currently, there's not been any changes and the differentials is still slightly negative.
Overall, majority of the economic indicators are bearish.
Stock Market Analysis (NSX50)
The stock market analysis shows that NZX50 recovered since the pandemic however over the past couple months NZX50 has seen a price decline falling sub 8000 (EUR).
This is bearish for EURNZD as it shows that Europe may be getting poorer in comparison to New Zealand.
Hedge Fund Positions (COTA)
The hedge fund positions as shown in the COTA currently sit at a negative differential meaning hedge funds are selling the Euro more than the NZD.
In this case hedge funds are selling both currencies so there's no clear conviction on sentiment.
Ideally, we'd like to see hedge funds buying NZD indicating potential strength in NZD from a big money view.
The price trends show that EURNZD has been in a clear down trend over the past couple years.
We are now reaching a point where sellers previously pushed prices lower...
However, we'll be looking out for future signs here as there's potential conflicting technical signals at this point.
Here I would use your own conviction to look out for what technical signs you deem viable for a potential downwards trend.