NZ dollar set to fall against loonie

21:55, Jan 29 2014

The gap between the best- and worst- performing commodities currencies this year is poised to narrow as investors' perceptions change on the outlook for monetary policy in New Zealand and Canada.

New Zealand's dollar is approaching overbought levels versus its Canadian counterpart, according to a measure known as the relative-strength index, which climbed January 14 to the highest level since 2009. With the Reserve Bank signalling this morning that interest rate hikes are just around the corner, this and other technical indicators signal the kiwi may have soared too high.

"Expectations for rate hikes might be overly priced in the kiwi," Desmond Chua, an analyst at CMC Markets in Singapore, said in a January 28 phone interview. "The kiwi looks rather overbought against the Canadian dollar. There are a couple of signs lining up to show that it might be coming off."

The kiwi is the best-performing Group of 10 currency this month after the yen, and Canada's loonie is the worst, as faster inflation increases the likelihood the Reserve Bank of New Zealand will lift borrowing costs. In Canada, the economy's struggle to gain momentum backs the case for lower rates.

While traders are certain the RBNZ will raise rates in 2014, they've pared their bets on the size of the increases from a three-year high. There's a 23 percent chance the Bank of Canada will cut borrowing costs by June, up from about 10 percent at the start of this year, swaps data show.

RBNZ Governor Graeme Wheeler will raise his nation's benchmark rate by 1.23 percentage points over the next 12 months from a record 2.5 per cent, a Credit Suisse Group AG index based on swaps suggests. That's down from the 1.26 points of increases seen as recently as January 2.


New Zealand building permits surged in November by the most in seven months, while annual inflation reached the highest in almost two years at 1.6 per cent, supporting the case for the RBNZ to tighten monetary policy. The central bank targets annual consumer price gains of 1 per cent to 3 per cent, with a focus on the 2 per cent midpoint.

"The growth picture in New Zealand looks very positive," Phyllis Papadavid, a London-based senior global currency strategist at BNP Paribas Corporate & Investment Banking, said in a January 23 phone interview. "However, what's priced in terms of rate hikes looks too extreme."

The New Zealand dollar has risen 5 per cent this month to 91.68 Canadian cents this morning, after touching 92.84 on January 23, the highest level since February 2004. It climbed 0.8 per cent to 82.82 U.S. cents. The loonie, named for the aquatic bird on the C$1 coin, fell 4.8 per cent this month to C$1.1161 versus its U.S. peer.

The kiwi's 14-day RSI versus the Canadian dollar climbed to 68.7 yesterday, approaching the 70 threshold that may signal an asset has climbed too far, too fast and is due to reverse course. The measure reached 83.3 on January 14, the highest since March 2009, data compiled by Bloomberg show.

The kiwi is 26 percent above fair value against the loonie, the biggest overvaluation among G-10 currencies, according to purchasing-power parity estimates based on consumer prices.

Signs of a recovery in Canada are also backing the case for a correction in the loonie against the kiwi, according to BNP's Papadavid. "Some of the better than expected news in Canada suggest that the weakness in the currency should be reversed in the next few weeks," she said.

Canadian retail sales rose 0.6 per cent in November to a historic high of C$41 billion (NZ$44 billion), beating all economist forecasts in a Bloomberg survey. Last week's report followed figures that showed record wholesale sales and factory orders rose to the most in nearly two years.

Stochastics, which measure the velocity of a security's price movement to identify overbought and oversold conditions, also suggest the New Zealand dollar's rally against its Canadian counterpart may be nearing an end.

The kiwi-loonie's k-line was 71.6 on January 24, dropping below the d-line of 85.5. The indicator, or k-line, shows the current price relative to highs and lows over a time period. Some analysts consider it a sell signal when the k-line crosses below its own moving average, or d-line, in the overbought area.

Other traders remain confident that more gains are in store for New Zealand's dollar following today’s policy meeting.

"Even if the RBNZ doesn't hike rates and we see a pullback in the kiwi, the dips will be an opportunity to buy it because the uptrend remains well intact," Stan Shamu, a Melbourne-based market strategist at IG Ltd., said by phone last week. The kiwi may target 93.50 Canadian cents in the short term, near the 2004 high of 93.58, he said.

The kiwi is poised to drop to 89 Canadian cents by the end of June where it will stay little changed for the rest of the year, according to the median forecasts in Bloomberg polls, based on cross rates via the US dollar.

Apart from RSI and stochastics indicators, what's known as a double-top pattern formed by the kiwi's January 14 and January 23 highs is also signaling declines, according to CMC's Chua. The New Zealand currency retreated 1.2 per cent a day after peaking at 92.84 on January 23 and dropped as much as 2.3 per cent in days following its gain to 92.10 on January 14.

New Zealand's dollar may approach 90 versus the loonie, a level last seen on January 20, according to Tom Fitzpatrick, the New York-based chief technical analyst at Citigroup Inc., the second-biggest currency trader. A close below that level heightens the potential for a drop toward 88, Fitzpatrick said in a January 24 phone interview.

"You're getting a divergence between the upward move to new highs in the actual kiwi-CAD versus a lower high in the momentum, suggesting that we may find ourselves turning down a little here," Fitzpatrick said.