Kiwi Momentum Signals Biggest Rally Vulnerable: Market Reversal

The rally in New Zealand’s currency against the U.S. dollar to its highest level in more than two years may be poised to falter as momentum studies signal recent gains are vulnerable.

The kiwi, as the currency is called, touched 87.46 U.S. cents on April 10, the highest level since August 2011. Technical signals known as stochastics suggest the currency may be overstretched, according to JPMorgan Chase & Co. A momentum indicator signals New Zealand’s dollar may fall 2.3 percent in 15 days, Bloomberg strategist Andrew Robinson wrote yesterday.

The kiwi has rallied almost 5 percent against the greenback this year, the most among major developed-market currencies, as New Zealand’s central bank is expected to raise interest rates with the economy forecast in a Bloomberg survey to grow 3.1 percent, the most since 2007.

“Momentum studies, like stochastics, are not confirming the new highs,” said Niall O’Connor, a technical analyst in New York at JPMorgan. “You have to watch price levels now.”

The rally is already under pressure. New Zealand’s dollar fell 1 percent over the past two days to reach 85.99 U.S. cents as of 11:47 a.m. in London. The kiwi slid today after data showed consumer prices rose 0.3 percent during the first quarter from the prior period, short of the 0.5 percent gain forecast in a Bloomberg News poll of economists.

Investors should watch the 86.02 uptrend line from the February low and the April and March lows at 85.14 to 85.01 for signs of support, O’Connor said.

Fibonacci Retracement

New Zealand’s currency surged last week as data signaled a strengthening economy. Manufacturing expanded 3.4 percent last month, the most since July, according to the Performance of Manufacturing Index compiled by the Bank of New Zealand Ltd. and Business NZ.

Robinson, a Bloomberg strategist in Singapore, said he’s targeting a drop to 84.81 cents, which would be a 38.2 percent Fibonacci retracement of the kiwi’s rally from Feb. 4 to April 10.

At the same time, futures traders have increased bets that New Zealand’s dollar will rise against the U.S. currency for eight weeks, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the kiwi compared with those on a drop -- so-called net longs -- climbed to 19,766 on April 8, the most since May and compared with 18,480 a week earlier.

Investors have been betting on kiwi gains as surging milk production, construction and exports mean the economy is expanding faster than its capacity, stoking prices. The Reserve Bank of New Zealand, which forecasts inflation will reach the midpoint of its target band by the second quarter, last month became the first among developed nations to raise interest rates this year, signaling that more increases will follow.

RBNZ Outlook

Traders expecting the central bank to drive further currency gains may be disappointed, according to Imre Speizer, a market strategist at Westpac Banking Corp. in Auckland. The RBNZ is likely to ease back on increases to the official cash rate if the local dollar, which is already 3 percent above its forecasts on a trade-weighted basis, climbs much further, he wrote in a note to clients April 14.

“If the NZD exceeded the RBNZ’s forecast, and its strength was expected to persist, then the OCR would not need to rise by as much as projected,” Speizer wrote.

Westpac forecasts the kiwi will be at 86 cents at the end of the third quarter and decline to 84 cents by year-end.

Support for the currency also may fade as dairy prices decline and U.S. economic strength boosts the allure of the greenback.

Dairy Declines

Dairy prices fell yesterday for a fifth successive auction held by Fonterra Cooperative Group Ltd., the world’s biggest milk exporter, suggesting it may have to reduce its forecast payout to New Zealand farmers.

The GlobalDairyTrade Price Index dropped 2.6 percent in a two-weekly auction overnight, extending its cumulative decline in the last five events to 21.9 percent.

Investors should sell New Zealand’s currency against the euro, Steve Barrow, the head of Group-of-10 research at Standard Bank Plc in London, wrote yesterday in a client note.

Traders should buy the euro at NZ$1.5960 and sell it should the currency fall to NZ$1.5740, he said. The euro has climbed 1.2 percent over the past two days and traded at NZ$1.6094 today.

Before it's here, it's on the Bloomberg Terminal.