On this weeks analysis we're coming back with another NZD pair to break down and see what's happening on an economic level. NZDCAD was the specific currency pair I chose to analyse with a quick summary below of what factors of analysis are agreeing, disagreeing or are neutral for the short idea. As the title suggests have the XMAS sales come early for NZDCAD as in two months time we'll be dipping into December and the economic outlook not looking great NZDCAD could see a hit throughout the next few months.
Some interesting points from the overview below is that Domestic stock markets and CAD COT positioning are not agreeing with the short idea. We'll need to monitor this over the coming week to see what kind of impact this will have moving into 2021.
NZDCAD Top Level Overview
Logikfx Macro Currency Strength Meter
The Macro Currency Strength Meter showed further diverging signals with NZD weakening over the past 2 weeks from -7 to now between -50 and -45. This is a significantly weak macro score for the NZD putting it on our short watchlist. On the flip side we can see CAD go from a slightly weak score to now a positive 19, this potential shift in strength could be signalling a appreciation in CAD going into 2021.
The GDP Differential indicator also shows that currently in 2020 we have a negative GDP differential which generally equates to negative growth in New Zealand in comparison to Canada.
International Trade Analysis
A2 milk is a big dairy producer in New Zealand which exports various dairy products across the world. Interestingly enough due to the demand of dairy goods, it actually managed to survive the effects of COVID as consumers were still buying necessity items likes milk and cheese! However, in the past couple months we've seen A2 milk to a huge dip which likely relates to a dip in NZDCAD. If this relationship holds true we could be seeing NZDCAD falling in value soon.
Steel & Tube Holdings Limited is a New Zealand-based company, which is engaged in the distribution, processing and fabrication of steel and allied products. Since 2014 we've seen prices consistently take a hit. COVID-19 hasn't helped with businesses postponing or cancelling construction projects profitability is likely to stay weak or negative. Overall, in the past 6 years there's been a positive relationship between STU and NZDCAD with both falling in value consistently. This is why currently the international trade analysis is agreeing with the short sell on NZDCAD due to various indications lining up to signal that a short is coming.
WTI is another analysis factor included within NZDCAD because WTI crude oil is a huge export within Canada. The Oil prices directly correlate to changes in exchange rate values so it makes absolute sense to include it when analysing any Canadian dollar pair. Oil prices have been on a downwards spiral since 2014 which actually saw the peak of NZDCAD. This downward pressure actually follows suit with NZDCAD so as Oil prices fell NZDCAD seemed to go down too and when they rose so did NZDCAD. Currently we're in a pullback of a major oil dip, we're reaching a level of resistance now on WTI so we'll monitor if this level gets rejected, if it does we may be in for a really big downwards move again.
Interest Rate Differentials
A common theme throughout the analysis has been the downwards trend of NZDCAD over the past 5 years. Is it a coincidence that all the economic factors have also been signalling this beforehand? I think not.. The interest rate differentials have too been decreasing with money flows now hitting a point where NZD and CAD have a 0% differential.
Meaning investors looking to gain more from one country can no longer do that in this case as both countries have equal rates. This has created a non bias overview as mentioned earlier, however, if CAD chose to increase rates or NZD chose to decrease rates it would be a really strong confirmation indicator of a downwards move.
Domestic Stock Market Performance
Here we have the domestic stock market performance and mentioned in the top level overview it was no agreeing with our idea. Why? Because we are now seeing a bounce back and growth in the NZX stock market growing by just under 3% in the last month and reaching new highs pre-covid!
This should actually be an achievement for New Zealand as one of the only countries in the world to combat the virus effectively. Therefore, there's no surprise the stock market was able to climb much higher than any other economy which are still in a slump.
Commitment of Traders COT Report Analysis
Currently we have conflicting positioning for the NZDCAD idea. More specifically the hedge funds are not currently 100% agreeing with the idea because they're still selling a lot of positions on the CAD but at the same time selling the NZD. This is why we're amber on the traffic light system for COT reports as both are cancelling each other out. Ideally, we'd like to see the CAD open interest start rising which would indicate hedge funds buying the CAD and selling the NZD.
Price Trends/ Analysis
Currently, we are seeing on the weekly levels a text book trendline formation. We've actually already have a rejection on the trendline which are in line with a fundamental conviction. This is the power of fundamentals as many traders out there will just line up all the trend lines they can and flip a coin to choose which to trade. Our way we check fundamentals first to filter the markets and then afterwards we can apply whatever price or technical analysis we want.
The rejection on the trendline does suggest sellers are coming in but the bullish retrace was strong too. We're now going to be keeping a close eye on price as there's a high chance now that NZDCAD should be heading south.
Average True Range Volatility Analysis
Here we have one of our excel templates, the volatility calculator. Based on the past 13 months of data we've worked out that on average NZDCAD will move up or down by about 3.6%. Therefore if we were to use the current prices on a short side move we'd see a stop loss of around 0.9058 based on volatility and a soft target of 0.7794.
However, we're still waiting on any confirmation signs and technical analysis you may want to add yourself. Don't go and jump into the idea straight away, go ahead and do some analysis yourself and see what you come up with and let us know!
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