Trading Forex - is NZD ready for a rally? by Mike P. Kulej

Over last few years we have witnessed historic drop in US dollar. Many currencies found themselves in a prolonged up trend, some of them reaching dizzying levels. Most notable has been Euro, which moved into all time high of over 1.6000. Canadian dollar also visited never before seen levels. Most remaining major currencies staged very impressive runs of their own. One of them was New Zealand dollar.

NZD, also known as "Kiwi" experienced perhaps the most telling rally of them all. Between 2001 and early 2008 it moved 0.4000 to 0.8200, effectively doubling in value against USD. We don't see something like this often, certainly not among currencies of major, established economies. Very impressive.

Earlier this year USD started to regain some strength. While eventually dollar gained ground on all currencies, NZD was the first one to exhibit weakness and turn. This happened in spite of having the highest interest rates in the developed world. According to some, they were the leading reason in Kiwi's earlier rise. By the time Reserve Bank of New Zealand cut rates for the first time in 5 years, NZD-USD had already lost 700 pips. That was in July.

Since then NZD experience continued fall. Being one of the so called "commodities currencies", it got under pressure when raw materials prices started to fall. After that economic news from coming from Auckland went from bad to worse: rising inflation and unemployment, huge slow down in house sales, loss of consumer confidence, etc,. List can go on and on.

By the time RBNZ was cutting rates again on September 11th, New Zealand dollar fell over 1700 to just under 0.6500. In a rather surprising move, the rates were lowered by 0.50% as opposed to expected 0.25%. Much to the surprise of trading public, this action failed to cause farther drop in NZD. There was a slide lasting couple of hours followed by a sharp rebound.

Is the worst over? While economy of New Zealand has not improved, news from other countries became much worse. It appears there is a world wide economic slow down, if not all out recession. From now on, most of the central banks are expected to be cutting rates. This means, that Kiwi will likely maintain large interest rate differential, making it an attractive instrument for investors seeking above average rates.

Looks like the recent low of 0.6500, will hold for some time. On technical bases, we can expected rally from current levels to perhaps as high as 0.7500. It is very unlikely we will see a very fast, strong move, but rather measured, steady appreciation in NZD-USD, lasting perhaps 6 months or so. Incidentally, that is not going to just against US dollar, but rather broader Kiwi strength.

It must be pointed out, that very long term charts, monthly, are still pointing to lower levels . That is in a little distant future. For now we can expect good size NZD rally, lasting long enough to present decent trading opportunity. In all likely hood, it has already started.

Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC. He specializes in mechanical trading systems as explained on www.spectrumforex.com . Spectrum Forex LLC offers numerous services to individual traders. He also publishes trading blog www.fxmadness.com . With questions and comments e-mail him at kulej@spectrumforex.com.