Currency Corner: how is the New Zealand dollar doing against its US counterpart?

The New Zealand dollar has been doing well against the US dollar in recent months, but has started to wobble a little. Is it still a buy? Dominic Frisby finds out.

Today we check in on a foreign exchange trade idea we considered back in early December. The idea was to buy the New Zealand dollar (the “Kiwi”) against the US dollar. I highlighted the trade knowing pretty much nothing about the current fundamental reasons behind why the New Zealand dollar should appreciate. My reasoning was based around the simple trend-following strategy that I have devised. 

By way of context, below I’ve taken a long-term chart of the pair, going back to 2003. When the chart is rising, the Kiwi is rising (and the US dollar is falling). And vice versa. The New Zealand dollar was at its strongest in 2011 and then again in 2014 at around US$0.88. It was at its weakest during the global financial crisis of 2008-2009 at just below US$0.50.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

I also draw your attention (with the red curve) to an attractive “double bottom” pattern, which you can see stretching between 2015 and the summer of 2019 at US$0.62.

Now let’s zoom in to a more recent weekly chart, with the six and 21 exponential weekly moving averages (EMA) – these are moving averages which put more weight on more recent readings – in red and blue respectively. The buy signal occurs when the red line crosses up through the blue line; when both lines are sloping up; and the price is above both lines. I’ve marked it in the chart below.

We got our buy signal at US$0.655 and there followed a nice rally to $0.675. Over the last three weeks however, the US dollar has strengthened, and some of that rally has been given back. As a result, we are now at $0.665 – about a cent in the green.

Advertisement
Advertisement - Article continues below

The outlook is wobbly – but the system is still saying “buy”

We are now at one of those slightly wobbly bits of trend-following, when it is tempting to take profits and jump ship. Over the last three weeks the price has definitely started to decline.

However, the system is the system and it must be followed if it is to work, and we currently remain on a buy signal. You could – if you want to manage your risk tightly – put a stop at just below the 21-week EMA (blue line) at, say, $0.648, but the risk is that this stop will get hit before the upward trend resumes. On the other hand, if the Kiwi were to collapse, at least you would be protected. 

The other strategy might be, simply, to remain long until we get a sell signal. That would be the reverse of the buy signal – when the red line crosses down through the blue line and the price is below. We might, for example, be heading for a repeat of the price action we saw in late 2018, when there was a promising buy signal that didn’t work out. By April 2019 it had turned into a sell (and the long trade would have lost money). You would, however, have made the money back by following the sell signal. That’s the frustrating thing about trend-following. In ranging markets you can get “whipsawed” (thrown out by zig-zagging markets) and lose money. In trending markets however, it is the best way to maximise gains.

But this is all conjecture. We don’t know what is going to happen. Second-guessing yourself works sometimes, but it is not a system. The system is currently on a buy signal. So be long. And find some means to deal with the wobbles, if you have them. 

The trade is a cent in the green. That’s good. My first target is the US$0.73 area, where there will be resistance. We might get there by early next year. In the longer term, we might even get back into the US$0.80s. That would mean President Donald Trump getting the weaker dollar he has been agitating for.

• Dominic’s new book Daylight Robbery: How Tax Shaped Our Past And Will Change Our Future, published by Penguin Business, is available at Amazon and all good bookshops. Audiobook at Audible.co.uk. Signed copies are available at dominicfrisby.com

Advertisement

Recommended

Visit/currencies/600640/the-currencies-to-bet-on-this-year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
Visit/506272/welcome-to-currency-corner-your-weekly-guide-to-the-worlds-biggest-market
Currencies

Welcome to Currency Corner – your weekly guide to the world’s biggest market

Forex is by far and away the biggest market in the world, with an average daily trading volume of over $5trn per day. Here, Dominic Frisby looks at th…
3 May 2019
Visit/economy/global-economy/601029/the-charts-that-matter-the-helicopters-are-unleashed
Global Economy

The charts that matter: the helicopters are unleashed

In a week when all sense of what's normal went out the window, John Stepek looks at what's happened to the charts that matter most to the global econo…
21 Mar 2020
Visit/node/601005
Currencies

The euro: will the single currency survive the coronavirus?

The EU has failed to convince anyone that it has either the will or the tools to keep the eurozone together in the face of the coronavirus epidemic.
20 Mar 2020

Most Popular

Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/investments/stockmarkets/601101/has-the-stockmarket-hit-rock-bottom-yet
Stockmarkets

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020
Visit/economy/small-business/601073/furlough-what-does-it-mean-and-how-does-it-affect-me
Small business

Furlough: what does it mean and how does it affect me?

Many companies have “furloughed” employees after they have shut down because of the coronavirus. But what does furlough mean and how does the scheme w…
30 Mar 2020