Fundamental Analysis Overview
Currently most fundamental signs are looking promising for the downside move on EURNZD. Sentiment is still on red meaning we need to wait in the next couple of months to see if positioning of hedge funds change. If they do we might get a chance to pull the trigger.
Quiet Christmas for the Euro - 2nd Wave Chaos
The infection rates across the world have started to exponentially move again some more than others and some actually combatting the virus quite effectively. New Zealand for example are a prime example of a great prevention policy against COVID with infections less than 20 for the past 5 months.
On the flip side across Europe which have much more dense communities we've seen COVID levels spike heavily with many hospitals now starting to struggle with the intake of COVID cases.
France for example since the initial outbreak in April have seen COVID cases nearly quadruple. There's been such a large spike in cases with France now going into a 6 week lock down on a economic level they're going to be hit dearly.
The same trend has also applied across various other European regions. Italy for example has seen a sharp consistent rise in COVID cases.
Germany who were once honored for their policy in fighting the virus have also seen significant rises in COVID cases which are now heavily hurting hospitals with some doctors even being told to stay working if they have COVID. For example, "Doctors in the Belgian city of Liège have been asked to keep working even if they have coronavirus amid a surge in cases and hospital admissions."
Let's now take a look at the macro economics to see the global impacts of such events across the world.
Logikfx Macro Currency Strength Meter
Checking the Macro Currency Strength Meter we've developed here at Logikfx which analyses various economic reports across different countries we've seen some interesting trends. You can see the blue line represents the Euro and we've seen it maintain and fall to a negative score over the past month. This is weak for the euro and represents potential future weakness is imminent. On the flip side New Zealand has gone from being a weak score to now a positive 20 across the month.
This crossover seen between 10/10/2020 - 17/10/2020 shows that potentially we should be looking to short EURNZD moving into the next couple months. This is the ultimate market filtration tool to find high probability setups. However, we don't just use the strength meter and enter trades straight away, we analyse on a relative level incorporating price and sentiment into the equation to see in the end how likely is it going to happen.
Logikfx GDP Differential Indicator
The GDP Differential meter is one of our new tools we've developed at Logikfx. It automatically allows the trade to choose two separate countries, their currency and compare it against another currency to see on a GDP basis which country should be strengthening or weakening.
What we can see is that currently in 2020 we have a positive differential which is great for the Euro but in 2021 we're actually expecting New Zealand to make an economic comeback far greater than Europe. Overall a negative 2% differential is incredibly bad for the Euro in the EURNZD pair so currently the GDP Differentials are agreeing with our strength meter.
Volkswagen Automaker Analysis
Volkswagen is a common company we incorporate within analysis when we're assessing the Euro. The correlation across EURNZD and VW is seen at a negative 55% so generally as VW goes up EURNZD goes down and vice versa. Since we've seen EURNZD make a slight bounce back since April increasing from 120 to 140 we've seen EURNZD also take a hit during that period and now it seems we're seeing a potential reversal.
New Zealand Dairy A2 Milk Analysis
Dairy prices are also another factor we analyse due to New Zealands huge exports in dairy products across the globe. They export to various countries including europe milk, dairy and meat products. Therefore, there's no surprise EURNZD and A2 Milk have a 30% positive correlation. This means as A2 milk goes up EURNZD normally rises and vice versa. The most recent data saw A2 Milk take a huge dip which also saw EURNZD take a small dip too, if this trend continues we may see a potential reversal overall in EURNZD which could downtrend for a long period of time.
Air New Zealand Analysis
The aviation industry was a huge sector of the economy which took a hit during the pandemic. Flights across the world got stopped and air travel companies took one of the worst hits in history. You can see as covid hit in March AIR dropped from 3 to 1. Since then we saw AIR increase in prices slightly which actually due to the negative correlation should equate to a potential downside move in EURNZD.
Overall, our international trade analysis of imports and exports is agreeing with the strength meter and our short bias on EURNZD.
Interest Rate Differential
The interest rate differentials are another strong macro indicator we include in the analysis. You can see over the past 5 years as the differential drops we see EURNZD fall but as the blue line increases and the differential rises over time so does the base currency too. Currently we've seen the differentials bottom out and stay stagnant, last time this happened in November 2019 saw EURNZD drop from 1.75 down to 1.68.
Domestic Stock Market Analysis
Overall the domestic stock market priced in Euros for New Zealand saw a steady rise over the past 5 years. However during COVID it did take a hit. Now the NZX50 has recovered with the New Zealand economy. This is actually disagreeing with our EURNZD short idea so we have this on red.
Commitment of Traders Report Analysis
Overall the commitment of traders analysis isn't showing signs of being ready yet. Both the euro and the NZD are not agreeing with the fundamental view. Over the next few weeks we'll be keeping an eye on market sentiment.
EURNZD Price Chart Behaviour
The weekly price levels on EURNZD have seen the pair on a steady rise over the past 3 years. However, looking at some key levels now we actually saw EURNZD peak during the COVID spike hitting a major level of rejection seen in 2011. Prices during 2011 fell for the next 4 years. If the selling power is to continue again at this level it could be a great long term down trend to get in on.
On the daily time frames to get entries we're looking at any price behaviour which could indicate a bearish signal. This could be anything from lower low to lower high formations and more importantly previous major lows being broken. This would signal that sellers are really in control so until then we will watch and monitor it's progress.
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