Milk this: NZD/JPY below 80 as dairy prices fall again

The New Zealand dollar has received a double whammy of bad news in this first trading week of 2016. First, it was the disappointing manufacturing data out of China, New Zealand’s largest trading partner, on Monday that weighed heavily on commodity currencies and global stock markets. Today it was Fonterra’s turn to provide some bad news at its closely-watched bi-monthly auction. The world's biggest dairy exporter’s GlobalDairyTrade (GDT) index fell 1.6%, giving back most of the 1.9% gain from the previous auction. More importantly for New Zealand, whole milk powder prices fell some 4.4%, though volumes increased. But overall this was a bad result for NZD as more than 7% of the nation's GDP is generated from the dairy sector. The RBNZ had previously hinted that interest rates will not be cut further lower from the current level of 2.5%. But given the persistently weak commodity prices and renewed growth concerns about China, the central bank may have to loosen its policy further in order to support domestic demand. This could weigh heavily on the kiwi once again.

The NZD/USD may have already formed a peak after it was unable to break decisively above a bearish trend line that has been in place since July 2014, around 0.6850. Another NZD cross that is also beginning to look extremely bearish is the NZD/JPY. As can be seen from the daily chart, below, the cross has been making a series of lower highs since forming a peak at 94.00 back in December 2014. Then, during the peak of the last stock market turmoil, on 24 August 2015, the pair dropped viciously to form a low at 72.70. It had since been rising inside what appears to be a long-term bear flag pattern – until the rally ran out of steam around 83.35/50 in December. This area was previously support and resistance. At the start of this year, the NZD/JPY has broken below several key short-term support levels, including 81.00/25, which is where the 50-day average met the previous support and the lower trend of the bear flag pattern. Now that it has broken out of the bear flag to the downside, we could see a significant drop in the coming days.

At the time of this writing, the NZD/JPY was below another key support at 80.00 and was just shy of the 38.2% Fibonacci retracement level of the upswing from the August low, at 79.30. Should this level break down then there is nothing significant in terms of support until the 61.8% Fibonacci retracement at just below 76.80. The 50% retracement may offer some support, too, at 78.05. Below these levels the next important support is the psychologically-important 75.00 handle followed by the August 2015 low around 72.70. Meanwhile on the upside, the broken supports such as 80.00 and 81.00/25 could now turn into resistance upon re-test.