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NZD - A disaster waiting to happen

  • #1
  • First Post: Edited 10:00pm Apr 20, 2007 1:39pm | Edited 10:00pm
I was looking at NZD fundamentals, it is interesting to note that NZD/USD has reached such a level which is difficult to maintain.

NZ is a small country with a limited economy. It mainly exports dairy products. Over the last few months due to high NZD the exports have dried out. No sane person will be willing to pay such a high cost for products you can purchase from other countries at less than half the cost. The difference between imports & exports is becoming huge, leading to negative trade balance, negative current account, which is difficult to sustain. Businesses are closing down in NZ. Inflation is rampant. Adding to this US economy is cooling which is further going to put strain on countries like NZ & AUD.

Institutions are pushing the price of the NZD high as they seem to be on a spree of mindless buying. I worry for people who have trusted their money to these so called fund managers who have bought NZD/assets in loads without paying attention to the fundamentals. As the fundamentals play out within the next few days/months, these assets are going to depreciate significantly.

I recall few months back when NZD/USD was around 69. NZ finance minister was jumping up & down that NZD is too high, have'nt heard anything from him lately when the NZD is nearing 75. The same is true for EU ministers they were going crazy with speeches that EUR is too high. EUR/JPY is unacceptable. The EUR/JPY level then was around 155. Now it is 163 & every thing is rosy. This clearly goes to show you that these ministers have limited knowledge of fundamentals & the rhetoric is all hollow.

Please be on the watchout for next week. NZD dollar is just barely hanging by the thread. Its reversal is inevitable & could be a violent one. Don't get trapped.

Any comments will be appreciated

Best of luck.

KKK
  • #2
  • Apr 20, 2007 1:47pm Apr 20, 2007 1:47pm
Do you have any reliable reports or statistics that support your conclusions?

Thanks
  • #3
  • Edited 2:46pm Apr 20, 2007 1:55pm | Edited 2:46pm
Quoting KKK
I was looking at NZD fundamentals, it is interesting to note that NZD/USD has reached such a level which is difficult to maitain.

NZ is a small country with a limited economy. It mainly exports dairy products. Over the last few months due to high NZD the exports have dried out. No sane person will be willing to pay such a high cost for products you can purchase from other countries at less than half the cost. The difference between imports & exports is becoming huge, leading to negative trade balance, negative current account, which is difficult to sustain. Businesses are closing down in NZ. Inflation is rampant. Adding to this US economy is cooling which is further going to put strain on countries like NZ & AUD.

Institutions are pushing the price of the NZD high as they seem to be on a spree of mindless buying. I worry for people who have trusted their money to these so called fund managers who have bought NZD/assets in loads without paying attention to the fundamentals. As the fundamentals play out within the next few days/months, these assets are going to depreciate significantly.

I recall few months back when NZD/USD was around 69. NZ finance minister was jumping up & down that NZD is too high, have'nt heard anything from him lately when the NZD is nearing 75. The same is true for EU ministers they were going crazy with speeches that EUR is too high. EUR/JPY is unacceptable. The EUR/JPY level then was around 155. Now it is 163 & every thing is rosy. This clearly goes to show you that these ministers have limited knowledge of fundamentals & the rhetoric is all hollow.

Please be on the watchout for next week. NZD dollar is just barely hanging by the thread. Its reversal is inevitable & could be a violent one. Don't get trapped.

Any comments will be appreciated

Best of luck.

KKK
An excellent fundamental analysis. It'll be interesting to see what happens.

Granted while the people of NZ might not be happy-the carry traders are. There isn't really too much NZ can do about it's currency level at this time besides complain since their currency floats freely in the open market. As long as the demand for NZD remains high, the Kiwi will also. At this point, they have to hope a window will open that will allow them to adjust rates down. Or at least talk about adjusting rates down.

Nice post though...
  • #4
  • Apr 20, 2007 2:19pm Apr 20, 2007 2:19pm
I am not a major in economics but it confirms my suspicions.
In late 70s early 80s US dollar was strong, but inflation and recession was rampant, so maybe weak dollar is not so bad.

Anyone is welcome to confirm or disagree.
  • #5
  • Apr 20, 2007 2:32pm Apr 20, 2007 2:32pm
Quoting irusoh
I am not a major in economics but it confirms my suspicions.
In late 70s early 80s US dollar was strong, but inflation and recession was rampant, so maybe weak dollar is not so bad.

Anyone is welcome to confirm or disagree.
Hi irusoh, i completely agree because as the currency gets higher priced the less willing people will be to buy that countrys goods and will start to look elsewhere for alternatives so exports decrease, less workers are needed, unemployment go up, economy slows down and eventually interest rates are lowered to jump start the economy, all going along with a weakening currency. as you said if the dollar is weak it may not be so bad because its cheaper to buy our exports compared to other countries with stronger currencies so more workers, less unemployment etc and our currency strengthens. im not a economist but like you i see the cycle go round and round. just my $/50 worth.
  • #6
  • Apr 20, 2007 2:42pm Apr 20, 2007 2:42pm
Here is a monthly chart of the NZD/USD.......some food for thought?

http://img359.imageshack.us/img359/2...enshot1xj5.png
Same Whore .... Different Dress
  • #7
  • Apr 20, 2007 3:13pm Apr 20, 2007 3:13pm
Quoting NewstraderFX
An excellent fundamental analysis. It'll be interesting to see what happens.

Granted while the people of NZ might not be happy-the carry traders are. There isn't really too much NZ can do about it's currency level at this time besides complain since their currency floats freely in the open market. As long as the demand for NZD remains high, the Kiwi will also. At this point, they have to hope a window will open that will allow them to adjust rates down. Or at least talk about adjusting rates down.

Nice post though...
If New Zealand were to lower its interest rates significantly, then high-yield seeking money (in particular carry trade) would be pulled out and invested elsewhere, causing the currency to weaken. Isn't the current run up in AUD and NZD mainly driven by interest rates?
  • #8
  • Apr 20, 2007 3:14pm Apr 20, 2007 3:14pm
here is what Vegas had to say in one of his blogs about carry trading. The day it unwinds, it's going to be hell for some and lots of cash for others.
Vegas:
"

EUR/JPY
This pair has been in buy mode since May 17th, and there has been no thrust at or beyond the first fib
extreme.
We traded once on the drop to the first fib, almost got stopped out, and then sold on the rally back for a
very small loss.
However, storm warnings are brewing in this pair making it extremely dangerous to be long on breaks.
I told you before, major news trumps all technicals, and on this theme we definitely have some major
news. For the first time I can recall in a cross, politicians are getting into act. This past week, all hell
broke loose when some Finance minister in Europe spoke about the EUR/JPY and the need for this
cross to stop appreciating because it was hurting European exports. He hinted that it will be a topic for
discussion at the upcoming G-7 summit in Singapore on September 15 – 20th.
Now, the problem here is the fact the entire universe is long EUR/JPY, and for that matter short the
Yen in all the crosses. Yen has been the “funding vehicle” for all the carry trades over the last couple
years. Past history suggests when this carry trade falls out of favor with the hedge fund community it
will be NASTY. I mean REAL NASTY. Account ending nasty. Moves that make you think your
machine is broken and can't possibly be right. I'm talking of anywhere from 500 to 2,000 pips in a
couple days. Moves that kill speculators and make every politician happy at the thought. The past
suggests this will be the result.
There are TRILLIONS of dollars worth of these trades on, and if this political talk that started this past
week starts to gain traction with other politico's in Japan and elsewhere, look out below. I can
guarantee you, right now, there are many hedge fund managers who are very nervous about this pair
and their long positions. When [ not if ] these guys hit the exit button at the same time it will get REAL
interesting. Your sell stop, in a scenario like this, is meaningless. With a long position, you could very
easily get filled 700 pips away from your stop [ or worse ].
Let's be clear.
I don't know when it will happen – I just know it will happen. All the dominoes are being set up. The
politico's are starting to send the “between the lines” message to the investment community. Right now,
everybody wants to play nice. But, the cannonball has been “shot across the bow”. It's just a matter of
time.
So, even though we don't have a reversal top above the fib extreme, I'm switching to sell mode in this
pair."

Everybody knows it's going to happen; I heard soros speak of it not too long ago. this is going to be a memorable story that's going to be studied in universities accross the globe for a long time after carries unwind.
  • #9
  • Apr 20, 2007 3:17pm Apr 20, 2007 3:17pm
Quoting parameswara
If New Zealand were to lower its interest rates significantly, then high-yield seeking money (in particular carry trade) would be pulled out and invested elsewhere, causing the currency to weaken. Isn't the current run up in AUD and NZD mainly driven by interest rates?
If they do that, they'll lose control of inflation.
  • #10
  • Apr 20, 2007 4:15pm Apr 20, 2007 4:15pm
Yesterday or the day before OZ was getting upset that the currency was getting to high up. Late last year when NZD was at a more "reasonable" price, their guys was complainging about hedgefunds and carrytrades and said the price should be in the .40's per usd(it dropped good that day).

I had the perfect technical analysis on this(USD/NZD) pair from 3 weeks ago. Actually caught a really nice drop overnight. But it hasn't done what it should've since, kept climbing. I'm a-waiting! But it really needed a good correction for 3 weeks now.

As far as the US, it's an importing nation. If I'm buying something, I want big powerful dollars. The minority of things being exported, whatever that is(pipes and planes?) isn't worth making those exports overpriced. Unless you want to bring all those factories and ghosttowns back online!
  • #11
  • Apr 20, 2007 4:28pm Apr 20, 2007 4:28pm
Quoting dunningduke
If they do that, they'll lose control of inflation.
but will the high NZD force NZ into a recession? a recession so bad they drop the rates and down comes NZD?
  • #12
  • Apr 20, 2007 4:38pm Apr 20, 2007 4:38pm
Quoting parameswara
If New Zealand were to lower its interest rates significantly, then high-yield seeking money (in particular carry trade) would be pulled out and invested elsewhere, causing the currency to weaken. Isn't the current run up in AUD and NZD mainly driven by interest rates?
Absolutely
  • #13
  • Apr 20, 2007 4:51pm Apr 20, 2007 4:51pm
Interesting why NZD is getting too high? NZD is climbing because of inflation and the expected (or rumored) rate hike next week. Based on experience, currency drops after an "expected" rate hike.

And I do believe this is a disaster waiting to occur. All eyes should focus next week when the drama unfolds.

IMO. Max NZDUSD would be 0.7550. But dont go buying hoping it would top this!
  • #14
  • Apr 20, 2007 5:15pm Apr 20, 2007 5:15pm
It is very heartening to note that people take fundamentals into considerations. Thanks for all the input. In situations like these where NZD, AUD, EUR, GBP, JPY are at extreme levels, it pays to sit back, analyze & then trade rather then blindly following the crowd or the so called advisors & gurus.

Lets look at another example. Boeing & Airbus are two main competitors in commercial aircraft industry. Airbus is already having problems & have already laid off workforce. Over more then 100 countries & private corporates place orders for planes every year. If an aircraft(hypothetical example) from Boeing costs 20 million dollars & from Airbus costs 20 million euros, then you can infer yourself which company is going down big time. This is exactly what is being reflected in Forex Trading. USA & its companies are very happy to keep the dollar lower & get the better of Europeans. But the Japanese are the ones who have understood it very well, & are happy to see their currency weaken further. The Japanese Govt., Investors & Companies are benefitting.
A 10%-20% extra tax on foriegn earned profits will significantly effect carry trades, but who is going to bell the cat. There is so much at stake & there are too many big fishes involved in this activity that they would never let this happen. So all this hollow rhetoric is just an eyewash.

How & when to use this situation to our benefit in Forex Trading is a million dollar question. We need to look for signs to enter before the free fall. We should be in before the event & be ready for the rough ride, obviously with minimal risk.

KAZAM
  • #15
  • Apr 20, 2007 5:18pm Apr 20, 2007 5:18pm
we saw a powerful move after NZD CPI Tuesday. It proved to us that many many institutions are long NZDUSD and they are willing to protect their positions and add to them as they think this is going higher. We watched NZDUSD drop 30 pips and return to pre news prices in a minute. Then in 20 minutes we watched highs breach and a new high establish.
The economic reprocussions are not realized yet, so i think this run could sustain to all time highs prior to falling. when it does fall i don't think it will fall as fast as some presume. i believe it will selloff as it has after hitting a new high any other time.
when these kind of things are happening is when we think it's the end of the world. in a month we'll see how it plays out and realize that was just the market running its course. the market is very stable.
there has been some talk of eurjpy dropping 1000 pips in a day. i think it will start dropping 200-300 pips per day for a few days but i don't think we'll see instant gaps. there are way too many people playing this thing to have something like that happen.
It really is that easy.
  • #16
  • Apr 20, 2007 6:59pm Apr 20, 2007 6:59pm
Quoting don perry
but will the high NZD force NZ into a recession? a recession so bad they drop the rates and down comes NZD?
...Does Japan ring any bells?
  • #17
  • Apr 20, 2007 9:23pm Apr 20, 2007 9:23pm
Quoting techno79
I had the perfect technical analysis on this(USD/NZD) pair from 3 weeks ago. Actually caught a really nice drop overnight. But it hasn't done what it should've since, kept climbing. I'm a-waiting! But it really needed a good correction for 3 weeks now.
Since the market didn't agree with me, I'm glad to know that at least somebody did!

Also glad that we've got a little thread going. I didn't notice any mention of this pair in FF's recent history. Of course, I could have missed something.
  • #18
  • Apr 20, 2007 11:23pm Apr 20, 2007 11:23pm
I should preface this comment by saying that I haven't traded options before, so please jump in and correct any misconceptions I may have.

If the NZD and other carry trade related currencies are 'disasters waiting to happen', isn't the smart thing to start buying puts on the NZD, calls on JPY, etc.? It seems like options are the ideal way to allow for a huge upside at a relatively small cost in the event that the carry trade does come unstuck one of these days.

Does anyone have any practical advice about how to implement such a play using options? I opened a demo account on OptionsXpress to investigate their offerings, but it seems they only have options on the four pairs (USDGBP, USDCAD, USDEUR, USDJPY) offered by the ISE (who mention on their site that NZD and AUD are planned future offerings). Are there other brokers out there with more sophisticated offerings? (I'd be tempted by SaxoBank, but their minimum balance is a little high for a side-project account)
  • #19
  • Apr 20, 2007 11:36pm Apr 20, 2007 11:36pm
Quoting brentmack
Since the market didn't agree with me, I'm glad to know that at least somebody did!

Also glad that we've got a little thread going. I didn't notice any mention of this pair in FF's recent history. Of course, I could have missed something.
March 28th I think it was. I'm just glad I had second thoughts and decided not to do another entry when I exited on a retrace that I didn't like!

You're right though. This is a good discussion to have. A lot of these currencies have had unreal gains and spikes,and I believe NZD had the biggest percent gainer against the USD in the last few months.
  • #20
  • Apr 21, 2007 3:56am Apr 21, 2007 3:56am
Quoting dunningduke
here is what Vegas had to say in one of his blogs about carry trading. The day it unwinds, it's going to be hell for some and lots of cash for others.
Vegas:
"

EUR/JPY
This pair has been in buy mode since May 17th, and there has been no thrust at or beyond the first fib
extreme.
We traded once on the drop to the first fib, almost got stopped out, and then sold on the rally back for a
very small loss.
However, storm warnings are brewing in this pair making it extremely dangerous to be long on breaks.
I told you before, major news trumps all technicals, and on this theme we definitely have some major
news. For the first time I can recall in a cross, politicians are getting into act. This past week, all hell
broke loose when some Finance minister in Europe spoke about the EUR/JPY and the need for this
cross to stop appreciating because it was hurting European exports. He hinted that it will be a topic for
discussion at the upcoming G-7 summit in Singapore on September 15 – 20th.
Now, the problem here is the fact the entire universe is long EUR/JPY, and for that matter short the
Yen in all the crosses. Yen has been the “funding vehicle” for all the carry trades over the last couple
years. Past history suggests when this carry trade falls out of favor with the hedge fund community it
will be NASTY. I mean REAL NASTY. Account ending nasty. Moves that make you think your
machine is broken and can't possibly be right. I'm talking of anywhere from 500 to 2,000 pips in a
couple days. Moves that kill speculators and make every politician happy at the thought. The past
suggests this will be the result.
There are TRILLIONS of dollars worth of these trades on, and if this political talk that started this past
week starts to gain traction with other politico's in Japan and elsewhere, look out below. I can
guarantee you, right now, there are many hedge fund managers who are very nervous about this pair
and their long positions. When [ not if ] these guys hit the exit button at the same time it will get REAL
interesting. Your sell stop, in a scenario like this, is meaningless. With a long position, you could very
easily get filled 700 pips away from your stop [ or worse ].
Let's be clear.
I don't know when it will happen – I just know it will happen. All the dominoes are being set up. The
politico's are starting to send the “between the lines” message to the investment community. Right now,
everybody wants to play nice. But, the cannonball has been “shot across the bow”. It's just a matter of
time.
So, even though we don't have a reversal top above the fib extreme, I'm switching to sell mode in this
pair."

Everybody knows it's going to happen; I heard soros speak of it not too long ago. this is going to be a memorable story that's going to be studied in universities accross the globe for a long time after carries unwind.

awesome stuff right there!
JOHN 3:16
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