My dual currency trade

Not sure if I was lucky or unlucky, my NZD was converted to USD at the rate of 0.539 thanks to the recent upsurge. According to my technical analysis, the rise of NZD/USD has been inconsistent with its underlying trend, ie giving a negative divergence. Improving risk appetite had been a main driver of kiwi's recent rally, but the correlation had faded in the past week.

Looking at NZD, basically economic growth had remained slow in the NZ as the current global downturn has dried up demand for its exports. The manufacturing sector decline for a 11th straight month which could lead companies to start shedding workers. The labour market has remained resilient adding workers over the past three quarters. Yet, if domestic growth falters in conjunction with exports then the country’s downturn could accelerate. The recent OECD report painted a sour picture as it forecasted that “a deep and protracted recession, involving a housing market correction and deleveraging of household and business balance sheets, is unlikely to be avoided”. The country’s high debt levels and credit rating risk make monetary policy tricky for the RBNZ, but markets are expecting another 25-50 bps cut at their June policy meeting.

As I'm typing, NZD is dropping back to the levels one month ago when I sold the currency option. On the current bull run on equities, my view is agreeable to the "bear-market rally" Blue chips started to rise to overbought levels and in the recent week, penny stocks saw a substantial rise in their prices. This worries me as I have learnt painful lessons that once pennies start to rise, it means that aunties and uncles started to flood the market. True enough, I have increasing inquiries by aunties and uncles come asking about how to buy shares, talking about market bottoming and economy recovery. Some even wanted to put EUR fixed deposit. To me, it is still a traders' market and real investors are still sitting by the edge watching on. Furthermore, in the forex market NZD and AUD has started to react downwards, which I intuitively see as early signs of a imminent correction of the equity market.

However, I do see a potential in AUD although it has risen by a fair bit. But it is this fair bit that confirmed the uptrend or consolidation mode. My next trade would probably pair with the AUD. Looking at current price, the AUD definitely has room for some retracement. AUD is a commodity currency. As long as there is demand for commodities, AUD will survive, and China has been the main buyer. My personal view is that AUD has bottomed and it is consolidating between 0.60 and 0.75 against the greenback now. It is trying to form an uptrend and once the trend is confirmed, there is no turning back.