Kiwi 8217 s Levitation How High

The Reserve Bank of New Zealand is widely expected to leave rates unchanged today at 2.50%. The central bank faces the task of having to contain a soaring currency and overheating housing demand. Failure to addressing the latter may continue underpinning the Kiwi and even resurrect anticipations of higher interest rates.

The Kiwi is the least underperforming commodity currency so far this year, losing 3.5% against the US dollar, less than the losses in CAD and AUD. Does that mean the Kiwi is the most likely to recover, or does it have the greater downside?

New Zealand is the world’s biggest exporter of dairy commodities, accounting for about 1/3 of international daily dairy trade. The Kiwi’s trade-weighted index is just 5% under its record highs attained in April, while the UN’s World’s Dairy Price Index is 7% below its record high, also attained in April. Meanwhile, the USDA’s Weekly Dairy milk price index remains at an all time high of $1.79 per pound, +13% year-to-date and +56% from the lows of June 2012.  With all agricultural prices down for the year—except for soybeans–it may be a matter of time before dairy prices join in.

Tensions in China’s banking sector, rumblings about the extent of the nation’s slowdown and the inevitable start of tapering by the Federal Reserve will carry negative implications onto the high carry currencies—beyond Australia.

The New Zealand dollar is an attractive candidate for the shorts, despite its 5-year highs against the Aussie. Many traders who have heralded the crash in the Kiwi have been stopped out or margined out. The charts below indicate further modest upside for the Kiwi, with a probable peak nearing $0.82, coinciding with the 55-WMA and the top of the 4-month channel. But beyond this summer, traders ought to heed the risk for deepening weakness towards 0.7770 (200-WMA), followed by the next support at 0.7400.