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Kiwi Golden Cross Signals Rally to Defy Wheeler: Market Reversal

Kiwi Golden Cross Signals Rally to Defy Wheeler
The trade-weighted kiwi has declined more than 5 percent since reaching a record in April. The central bank sold a net NZ$256 million ($204 million) that month. Photographer: Brendon O'Hagan/Bloomberg

July 25 (Bloomberg) -- New Zealand’s dollar is poised to extend a rebound from its worst quarter in almost two years as trading patterns signal that investors are defying a central bank rooting for a weak currency.

The kiwi’s five-day moving average against the U.S. dollar rose above the 25-day measure last week, forming a golden cross pattern that’s a bullish indicator, according to Gaitame.com Research Institute Ltd. Since sliding 7.6 percent from April through June, New Zealand’s currency has rallied to a one-month high of 80.13 U.S. cents, surpassing a key Fibonacci level that typically precedes further gains.

The Reserve Bank of New Zealand met today as the kiwi starts to reverse losses that Governor Graeme Wheeler aided with currency-market interventions aimed at fostering an export-led recovery. While the central bank has been reluctant to raise its key interest rate from a record-low in case it strengthens the currency, swaps prices are signaling that by next year the nation will have the developed world’s highest borrowing costs.

“The five-day and the 25-day moving averages have crossed, and both of them are pointing up,” said Takuya Kawabata, an analyst in Tokyo at Gaitame.com, a unit of Japan’s largest currency-margin company. “The fundamentals for the kiwi dollar are also looking positive. While the RBNZ is expected to keep rates unchanged this year, many are expecting them to hike in the early part of next year.”

Prompting Rally

When the New Zealand dollar’s five- and 25-day moving averages last formed a golden cross on March 25, the currency went on to rally 4 percent in less than three weeks to a 20-month high of 86.76 U.S. cents reached April 11.

This month’s gains pushed the kiwi above what’s known as the 23.6 percent Fibonacci retracement level from the April peak to a one-year low of 76.84 U.S. cents on June 24, data compiled by Bloomberg show.

The kiwi may rise toward the June 14 high of 81.37 U.S. cents “in the near term,” Kawabata said. Should it break above that level it may approach 81.80, the 50 percent Fibonacci retracement level, he said.

Fibonacci analysis, based on the work of 13th century mathematician Leonardo of Pisa, is founded on the theory that prices rise or fall by certain percentages after reaching a new high or low.

New Zealand’s dollar rose 0.6 percent to 79.75 U.S. cents at 7:55 a.m. in Tokyo. It closed above its 50-day moving average on July 22 for the first time since May 8, another bullish sign.

Wheeler Intervenes

The RBNZ said today that the pace of future rate increases will depend on the booming housing market’s impact on prices and reiterated it will keep rates unchanged this year. Swaps data compiled by Bloomberg show that traders increased wagers on a January rate increase to about a 50 percent chance, compared with 17 percent odds seen yesterday. That could push it above Australia’s key rate and make it the highest among a group of 12 developed economies.

“Although removal of monetary stimulus will likely be needed in the future, we expect to keep the OCR unchanged through the end of the year,” Wheeler said in a statement today. “The extent of the monetary policy response will depend largely on the degree to which the growing momentum in the housing market and construction sector spills over into inflation pressures.”

Wheeler said on May 8 that he was intervening to weaken the New Zealand dollar, exacerbating the second quarter’s biggest plunge since the three months ended Sept. 30, 2011.

Kiwi Decline

The trade-weighted kiwi has declined more than 5 percent since reaching a record in April. The central bank sold a net NZ$256 million ($204 million) that month.

In a May 30 speech, Wheeler said he was prepared to step up his efforts. The central bank bought a net NZ$90 million in May, according to RBNZ data published last month.

The New Zealand dollar was the second-worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes in the past three months, tumbling 5.3 percent. The Australian dollar lost the most, with an 11 percent slide.

Double Bottom

The kiwi is overvalued and the central bank’s limited ability to weaken it by currency intervention is like having a “peashooter in a war zone,” New Zealand Finance Minister Bill English said in a June 25 interview.

The kiwi formed a double-bottom pattern with its lows of 76.84 U.S. cents on June 24 and 76.88 on July 5, creating a base for it to gain further, said Gaitame.com’s Kawabata.

“You still got attractive yields on offer in New Zealand,” said Peter Dragicevich, a Sydney-based currency economist at Commonwealth Bank of Australia, the nation’s largest lender. “You’ve still got the RBNZ as one of the only Group of 10-currency central banks with a tightening bias. That’s quite supportive for the currency.”

The kiwi’s 14-day relative strength index against the U.S. dollar was at 56, after falling to 29 in May, below the 30 threshold that traders take as a sign that a currency has fallen too far, too fast.

“The New Zealand dollar RSI is moving toward the top of its band, but still not anywhere near overbought,” said Sam Tuck, a senior foreign-exchange manager at ANZ Bank New Zealand Ltd. in Auckland. “The kiwi is bumping against the psychological pivot number around 80” U.S. cents, and should that level give way, then the next level of interest would be around 80.80 to 81.20, which are longer-term pivots over the last couple of years, he said.

Risk Reversals

Traders are paying the smallest premium in almost three months for options granting the right to buy the U.S. dollar against the kiwi compared with those giving the right to sell. The New Zealand dollar’s three-month risk reversal rate was at minus 2 percent, about the least negative level since May and up from a one-year low of minus 3.235 percent on June 21, data compiled by Bloomberg show.

“We could see some rebuilding of New Zealand dollar long positions as people seek to find yields,” said ANZ’s Tuck. “We would expect the Reserve Bank to continue in its long-held and long-stated belief that the New Zealand dollar is overvalued. That might temper somewhat the move up in the kiwi dollar, but I wouldn’t imagine that to have much of a long-term impact.”

To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Hiroko Komiya in Tokyo at hkomiya1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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