The North American trading day has been a perfect example of the recent craziness involved in equity and commodity markets as Dow and S&P are trying to gain back their Friday losses and WTI is finding even more strength as we start the week. Meanwhile, the USD is getting back some of its mojo it lost last week as well with the AUD looking like the biggest target of USD strength thus far. Big news overnight was that China lowered its Reserve Requirement Ratio by 1 percent, the biggest reduction since the Global Financial Crisis. The initial reaction to the easier monetary policy was risk positive, but the worries about a Chinese slowdown are beginning to come to bear.
The decline in the AUD is particularly interesting considering that it usually correlates with its brethren to the East, New Zealand. While the NZD has come down from its highs, it hasn’t felt the sting quite as much as the AUD, which could mean one of two things: Either it will catch up and decline sooner rather than later, or it is simply on better footing than the AUD and won’t have any further deleterious action. Considering the recent price action in milk products, I’m leaning more toward the former.
The GDT Milk Price Index is a vital measure of New Zealand’s largest export, accounting for about 15% of exported products, and the index has declined in each of the last three auctions by 8.8%, 10.8%, and 3.6% respectively. Combined with the slowdown in China on the GDP front and the RRR cut to try to supplement a slowing economy, demand for milk concentrate from New Zealand may continue to wane, depressing milk prices even further. Being that the civilized world is battling low inflation currently, that is a disastrous scenario for the Kiwi nation.
On the technical front, since breaking the 0.77 level on the NZD/USD late last week, the Kiwi has been pulling back on some of those gains. If it continues on this pullback, there may be a level of resistance that corresponds with a rising trend line, the 61.8% Fibonacci retracement of the most recent advance, and a previous level of support/resistance near 0.7540. While this may not be a sign of USD returning to dominance, the run against it last week may have been a little overdone as it gains back some respectability in the early part of this week.
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