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After a sharp fall, this currency is getting ready to rally

by , 14 July 2015

This year, the dollar has been strong. But some currencies have managed to claw back some ground against the greenback.

Yet two major currencies that have weakened against the dollar are the Japanese yen and the New Zealand dollar.

Take the New Zealand dollar, it's seen a dramatic fall in value. But times could be changing for the currency.

It could be preparing to rally…

This currency is down over 7% in four months

Since the middle of March, the New Zealand dollar is down 7.2% against the dollar. Looking back over the past year, it’s down 24%.

Look at the chart below showing the sharp decline of the New Zealand dollar against the dollar over the past year…

Chart of NZD/USD

This is quite a spectacular fall. And traders are scared the currency could weaken further.

Looking at the Commitment of Traders (COT) for the New Zealand dollar, traders are hating the currency at the moment.

The COT is a weekly report that shows the real money bets of futures trades, Brett Eversole in Daily Wealth explains.

What the COT shows you is whether traders are loving or hating an asset. When it shows an extreme it can be a useful contrarian indicator.

Have a look at the chart below…

Chart of New Zealand dollar Commitment of Traders

This chart is from the first week in July and shows extreme negativity against the currency. It indicates traders expect the currency to keep falling.

Signs of a stronger New Zealand dollar

Historically, when futures traders all agree on something, it tends to lead to the opposite happening. And this means the New Zealand dollar could be preparing for a rally.

In the past, when the New Zealand dollar has hit a negative sentiment extreme, it’s risen 11.7% on average in the year following this.

But it’s too soon to be putting long trades on the New Zealand dollar against the US dollar. Before that happens there needs to be some recovery in the value of the currency.

This could happen over the coming months. It’s a worthwhile currency to keep an eye on. When it starts to show signs of recovery, it could be a very profitable trade to consider.

So there you have it. Why after a sharp fall, this currency is getting ready to rally.

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After a sharp fall, this currency is getting ready to rally
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