NZD-AUD Correction Lower Ahead

Boris Schlossberg at BK Asset Management tells us why the New Zealand dollar is under the hammer on Monday morning:

"The kiwi came under heavy selling pressure at the start of the week's trade after the country's milk producer Fonterra announced that it may have made several bad batches tainted by botulism.

"China, Russia and a slew of Asian countries immediately suspended the imports of milk powder until Fonterra could reassure that the production was safe. Milk is one of New Zealand's key imports and today's news crushed the kiwi which dropped more than 100 points off its close to trade as lows at 0.7736 before recovering towards the 0.7780 level in morning European trade."

Leander Dreyer at Jyske Bank says there is the potential for the New Zealand dollar to fall yet further should the ban not be lifted within weeks:

"It is still not known for how long the ban will apply, and therefore the extent of the impact on New Zealand's exports is uncertain. The reason why the weakening was this big is that products from Fonterra to China account for a high percentage of New Zealand's exports.

"Generally, not much will happen if the ban is raised within two weeks. If it will last longer, NZD will most likely fall steeply in line with AUD over the past quarter."

Dreyer goes on to point out that the weekly chart for EURNZD shows clear indications of a bottom formation (double bottom 2012 and 2013).

"If EUR-NZD closes above 171 this week, we expect that the way is paved for a movement to 180," says the analyst.

(Below: Has EUR-NZD bottomed? Click to Enlarge).

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Major Correction Ahead for NZD/AUD?

Those with an eye on the New Zealand dollar versus Australian dollar exchange rate are warned that the AUD could extend today's rebound.

As Imre Speizer at Westpac Bank says:

"The uptrend since March remains intact although a sizeable correction may be unfolding. We target 0.8525 this week, even given the likelihood of an RBA rate cut.
(Below: NZD-AUD rally, Click to Enlarge).

"That is because global speculators have built large long NZD/AUD positions and these may be pared amid the current tainted dairy product episode."

Beyond that, though, Speizer expects NZD/AUD to rise above 0.90 by year end. The RBNZ will start hiking next year from 2.50% whereas the RBA will still be easing to 2.00%.
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