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Best Time, of the Year, Fundamental Outlook, Fundamental Analysis, fx trader, forex 4 GBPNZDWeeklyChart 4

With this deterioration in data, came a shift in central bank stance. The RBNZ (Reserve Bank of New Zealand) quickly changed tact and, come June’s central bank meeting, interest rates were cut (NZD negative). From this point the NZD found itself weakening throughout the months which followed and therefore allowing its stronger GBP opposition to surge against it (see Chart 4). Selling the NZD against its strongest counterparts became a huge focus for us from June 2015 onwards as the RBNZ remained ultra-bearish in its outlook and continued to cut rates periodically.

Example 4 - The curious case of NZDUSD

One forecast which proved to be incorrect in our prediction was with NZDUSD. At the end of 2014, when making the 2015 forecasts, the outlook on the New Zealand economy was looking healthy, the RBNZ was upbeat and in the middle of a rate hiking cycle. This was currency positive and therefore keeping the NZD well supported. This fundamental picture was suggesting strongly to us to be a buyer of the NZD against its weaker counterparts. However, as we learnt above, the data out of the country began to deteriorate and gradually the RBNZ began to voice its concerns. As soon as we heard these concerns, immediately we stopped having a buying bias on the NZD and instead waited until the central bank firmly issued a directional stance either way. Come June 2015, when the economic picture had worsened in New Zealand, the RBNZ firmly planted themselves in the bearish camp and started to cut rates (currency negative).

From this point onwards, the NZD became a highly bearish and weak currency and one which we used time and time again to pair against its stronger counterparts including the USD and the GBP. NZDUSD fell over 1000 pips from the point where the RBNZ changed stance and once again signified the importance of tuning into the fundamentals (see Chart 5). This provided the information we needed to quickly change our view on the NZD currency and instead of continuing to buy it, and getting hurt, we instead focused on selling it in line with the central bank and large institutional traders where the odds were heavily stacked in our favour.

Best Time, of the Year, Fundamental Outlook, Fundamental Analysis, fx trader, forex 5 NZDUSDDailyChart 5

So, although I was completely wrong with my forecast about NZDUSD heading higher, I did not let ego, or the fact that I was wrong, get in the way. In fact I was happy to be proved wrong as it allowed me to seamlessly change my directional view and profit essentially from the very start of the downward trend.

It is important to point out here, now that we have taken a look at several large 2015 trends, that these moves are not driven by technical. They are driven by fundamentals and therefore by ignoring them, it is likely to prove a huge disadvantage.

How to master the fundamentals

Focus on the Central Bank ‘Stance’

Hopefully from reading through the few examples above you are starting to ask yourself ‘how can I do the same’? How do I get to understand and implement the fundamental outlook? Well this is what we are going to touch upon briefly now.

In its simplest form, the most powerful way to know whether a currency is weak or strong, and likely to weaken (against its stronger counterparts) or strengthen (against its weaker counterparts), is to know what the respective central banks ‘stance’ is. Stance is simply whether the central bank are currently bullish or bearish on the economic outlook for their nation and what key economic data points are driving this view i.e. inflation, growth, employment etc…Generally speaking an upbeat central bank leads to strength in their respective currency as expectations for future rate hikes grow, and vice versa if a central bank is bearish in their outlook.

The great thing, and very accessible thing about this important factor, is that each major central bank will communicate to the market every single month via their monetary policy statements, press conferences and supporting speeches. These are the opportunities for us as traders to take heed of what is being said, identify a clear stance and then align our directional bias on a currency with this stance e.g. The ECB became very concerned about inflation and the overall outlook on the Eurozone economy. As data worsened the ECB were then forced into action which included a QE programme and cutting interest rates. Our directional bias was then quickly aligned to that of the ECB (to sell the EUR against its stronger counterparts). The above factors then combined to cause the EUR to weaken significantly for several weeks thereafter.

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