We're going to run through some Forex Fundamental Analysis because we're not about just technicals here.
Gross Domestic Product (GDP)
Although GDP Differentials are tightening overall differential is net positive at 0.9% which is classed as a very slight long bias moving forwards in 2020.
Not confident as GDP is a lagging indicator of what’s going on in the economy, but it shows us what’s happened and what is happening.
Overall a fairly positive correlation between GDP differentials and price
A2 Milk Company Analysis (Dairy Major NZD Export)
Straight away we can see a negative correlation between the performance of the dairy company A2 Milk and the price of NZDCAD.
New Zealand itself is a major exporter of dairy products and meats so there’s no surprise of this relationship between the two.
If the price of the exchange rate is decreasing the performance of the company is better meaning a weaker currency value.
Countries around the world can buy more dairy products than if the currency was strong.
Latest values are showing an increase in performance from A2 Milk by 6.59% which indicates a potential short pending for the NZDCAD currency exchange rate.
This is because stock performance can sometimes be seen as predictive in nature for future currency value.
Steel & Tube Holdings LTD Analysis
New Zealand also export some major building supplies and components such as computers and broadcasting equipment.
We’ve analysed the correlation between STU Steel and Tube Holdings and the NZDCAD exchange rate to see whether we can uncover any details.
What we can see is at first there was a negative relationship between the 2 from 2010 and 2013.
Since 2014 however, there’s actually been a fairly positive correlation between the exchange rate and the company STU.
Using the last 5 years as a starting point we’d give the analysis a slight long bias due to recent performance of STU increasing to 5.06%.
However, if we were to use the overall correlation of the last 10 years it has shown to be a negative correlation meaning a slight short bias of the exchange rate NZDCAD.
Interest Rate Differentials
Straight away in the past year we’ve seen the interest rate differential between the 2 economies tighten.
New Zealand have decreased their interest rates heavily whereas Canada have increased their interest rates.
This type of relationship shows how investors can still attain higher yielding assets in New Zealand due to interest rates alone which may increase future money supply.
However, if the trend continues and we see the interest rate differentials go in favour of CAD we don’t want to be a in a long-term long position in the markets.
How do we score this and see what may happen in the future?
Since the Interest rate differential has been dropping significantly in the last year we’re signalled with a short bias on NZDCAD.
If the differentials in the future look to increase again then we want to flip this analysis and show a potential long bias.
NZX 50 (CAD) vs NZD/CAD
Overall the NZX 50 has been rising since 2015 whereas since 2015 the NZDCAD exchange rate has been dropping significantly
Therefore, it shows a negative correlation between the country’s main stock index and their wealth compared to the exchange rate of NZDCAD.
We can score it as follows:
When the stock index is rising, we expect the exchange rate to fall
When the stock index is falling, we can expect the exchange rate to increase
Overall final analysis we’ve scored it as positive -15 for NZD and for the CAD we’ve given it a score of 12. This is quite a good indicator for a short on NZDCAD
Overall in the COT report analysis hedge funds are net short on the NZD meaning the market is agreeing with our idea.
However, there has been reducing open interest in the past few weeks towards the long side.
Ideally, we’d like to see reducing open interest towards the short side (pink line heading down).
So, although this is good for our idea, we could see the market change.
Very good signs of CAD strength regarding the sentiment of Hedge funds.
They’ve flipped from being net short to net long meaning we could start to see a big shift in CAD strength going into 2020.
This aligns well with our NZD idea which shows overall hedge funds are short NZD/CAD.
Regarding the ATR calculator we’ve chosen a 3-month horizon to see how volatile the NZDCAD has been the past 3 months.
This has allowed us to set a potential stop loss of 1.5% of the current price for our short idea.
If you want to be on the safer side, you can look toward a longer time horizon such as a 12-month volatility analysis.
Can expect the position to be open for 1-3 months before seeing how it will materialize.
Touching on the technical we can see that it’s respected a daily trendline and since started a retrace.
It’s broken the daily lows that were set during December 2019 at 0.86134.
Ideally, we want the market to agree with our short idea so any future signs of shorts such as candlestick formations and bearish candles is a great indication of a promising short.
We’ve set our soft target at 0.8292.
This is a location where we can see some buyers enter the market and push the price higher.
On this retrace we could have the opportunity to scale into our idea or just let our idea run towards a further 1:6 Risk reward.
However, at that point stop losses should be moved to reduce risk on the position and make it risk free.
If you want to learn the analysis steps and the exact system we use
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