EURZND – Silently slipping away

As the Euro kept creeping up higher against the greenback and the bullish trend of the British Sterling supported by what seems to be a text economic recovery, most trading circles obviously kept their focus on the majors such as the EURUSD, GBPUSD and not to forget some of the Yen crosses.

While the British Pound might have found favour with the traders and thus becoming a currency to trade, the EURNZD has been virtually ignored despite some major market moving fundamental developments. Unless you’ve been living under a rock, the RBNZ in March hiked the interest rates by 25bps to 2.75% making it the first in the group of developed economies to hike interest rates. In a world of currency wars and record low interest rates, the RBNZ rate hike is something that definitely deserves a second glance. Some institutions are also forecasting for a further rate hike throughout 2014 to atleast 3% – 3.25%, making the Kiwi Dollar a prime candidate with less attention to go long against most crosses.

The Euro on the contrary, continues to baffle the trading community keeping them hooked, especially against the US Dollar. Institutions such as Citi for example continue to build their case against Euro shorts, but the charts seem to have a life of their own.

Of course the yearly high of 1.3966 made in February has still not been taken out. But the pair has been definitely teasing traders at large. Comparing to the fundamentals, the current strength of the Euro sure is confusing. Perhaps it is to do with the Euro slowly gaining recognition as a safe haven, as was evident during the recent Russia – Ukraine crisis where the Euro usually falls on peripheral risks but this time around continued rising unfeterred. Or perhaps the markets are really putting Draghi to the test, which so far has been merely words such as “…doing everything we can to support the Euro..” or “continue to keep an accommodative monetary policy” without any actual follow-ups.

Risks of Inflation or rather dis-inflation is starting to worry analysts and economists alike and when the ECB did not cut interest rates in March, the Euro of course rallied. Every now and then we do get to hear about some of the Central Bankers talking about negative interest rates. The Euro would only merely react for a day at most only to trim its losses.

Fundamentally stronger

The chart below is a comparison between the New Zealand and the Eurozone GDP Growth rate which clearly shows a healthy GDP growth rate compared to the Eurozone.

NewZealand - Eurozone GDP Growth Comparison
NewZealand – Eurozone GDP Growth Comparison (Source: Tradingeconomics.com)

Even if one considers the unemployment rate, its not hard to miss the stark differences. While New Zealand’s unemployment rate is 6% (Q4 – 2013), the Eurozone’s unemployment remains at 12%.

New Zealand - Eurozone Unemployment Rate
New Zealand – Eurozone Unemployment Rate (Source: Tradingeconomics.com)

And lastly, the Eurozone has been experiencing a declining inflation rate with the latest number at 0.7% while New Zealand’s inflation rate stands at 1.6%.

Putting all the above together, the Eurozone is clearly heading to a point where the ECB is likely to intervene to help the economy. Although Germany, Europe’s powerhouse is against the ECB embarking on QE, the ECB is left without much of options except to lower the already low interest rates, which sadly so far hasn’t shown any significant impact to boost the Eurozone’s economic growth.

As the New Zealand economy continues to grow stronger, the RBNZ is definitely going to shift gears in order to keep the country’s economy from overheating. Putting the above together, the Kiwi is without a doubt more robust compared to the Euro from a fundamental point of view. Technically as well, the EURNZD has been on a free fall since 2009.

With a 2013 high and low established at 1.72738 and 1.50796, the pair opened 2014 so far making a high at 1.67860. If the pair fails to make a fresh high, the bearish momentum is likely to continue. On the downside, last year’s low gives us a possible target for EURNZD shorts.

EURNZD - Technical Analysis
EURNZD – Technical Analysis

The Weekly EMA’s of 52, 26, 13 also paints a bearish picture with price already trading well below the three EMA’s. The EURNZD is however pierced a key short term support level near 1.58 region and could possibly bounce back up to test the level of 1.634. If this level acts as resistance, we could possibly short EURNZD and book partial profits near the 1.58 region and let the remainder of the trade continue to run its course.

With EURNZD shorts attracting a positive overnight swaps (rollovers), taking the EURNZD short at the right price level and letting the trade run could yield not just the profits but some additional overnight positive swaps as well.