NZDCAD Policy Divergence Trade Idea

The New Zealand Dollar has fallen significantly across the board recently due to uncertainty regarding monetary policy. On the other hand, the Canadian central bank is likely to hike rates next week, which provides a potential policy divergence trade on the NZDCAD pair.

The Reserve Bank of New Zealand have changed their stance on monetary policy recently by stating that the next rate move could be up or down and either move is equally likely due to domestic and global economic conditions. At the same time, other major central banks are either hiking or holding rates with the intention to tighten as soon as they see fit. This has made traders extremely bearish on the New Zealand Dollar. Data from New Zealand and comments from the RBNZ will hold a lot of importance over the next few months as it will determine which way rates are most likely to go.

Meanwhile, the Bank of Canada are set to hike rates next week with investors pricing in a 70% chance of the hike. Although Canada faces economic uncertainty from the global trade war as well as the possible collapse in the NAFTA negotiations, inflation is at 2% and the bank expects to continue hiking rates.

These contrasting monetary policies have already resulted in a 4% drop on the NZDCAD currency pair since mid-June. In addition, the pair has retraced almost 38.2%. This provides an opportunity to enter into short positions which can be held over a short or medium term. With the BOC hike almost fully priced in, investors will be more interested in the policy statement when it is released next week. In addition, forecasts for the New Zealand CPI will be coming out next week Friday which could add further pressure to the Kiwi. The main risks to this trade would be a dovish hike from Canada, NAFTA news resurfacing or a string of positive data from New Zealand. In current situations, further pullbacks on this pair provide opportunities to enter or add to existing positions unless there is a fundamental reason for the move upwards. Targets for this pair are at 0.87, 0.86 and 0.84.
Bearish PatternsBeyond Technical AnalysisCADFundamental AnalysisNZDNZDCADshort

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