(As written for My Paper on 1 June 2011. Click here to enlarge)

I was in Jakarta last week to speak in a conference called the Asian Commodities and Derivatives Conference.

The main theme in the conference was agricultural commodities – the factors that influence its price, how traders add liquidity to the market and where prices could be by the end of the year.

As I left the conference, I was mulling over how currencies play such an important part in the movement of commodity prices. After all, commodities had a huge run after the Fed announced QE2 in November last year.

One of the biggest commodity currencies among the Forex majors is the Kiwi, or New Zealand dollar (NZD). Enjoying a spectacular run against the US dollar for the last 2 weeks, the Kiwi recorded a NZ$1.19 billion trade surplus in April, almost twice the estimate of Bloomberg economists.

Exports to China, including milk, lumber and meat have increased 40% from last year to meet China’s demand and insatiable appetite for commodities. High Asian demand and commodity prices have driven NZD/USD to as high as 0.8217 yesterday, a level not seen since exchange-rate controls were ended in 1985.

In just over 2 months, the Kiwi has risen over a thousand pips against the greenback since its low on 17th March. Its steep rise last week was also due to reports that China’s sovereign wealth fund, Chinese Investment Corporation (CIC) may set aside up to 1.5% or about NZ$6 billion of its foreign exchange reserves to invest in New Zealand companies, government bonds and assets.

China aside, Singapore, Hong Kong and Malaysia have also expressed interest in buying New Zealand debt as Asian governments seek to reduce their reliance on U.S. dollar assets.

Everything seems rosy for the Kiwi.

However, as an export-driven nation, the strength of its currency could start to weigh on the export sector as importing countries will have to pay more for New Zealand exports.

If this happens, a drop in demand due to a higher exchange rate could hamper the nation’s economic recovery from the 2 earthquakes in Christchurch that caused an estimated NZ$15 billion in reconstruction costs.

This could lead to a weaker currency in the near-term. Chances of that happening however, look slim.

“Rising incomes in the Asian region will generate a long-run demand for agricultural commodities, with the New Zealand economy better placed than most as a supplier, Richard Grace, chief currency strategist and head of international economics at Commonwealth Bank of Australia, wrote in a note to clients. “These developments will be reflected in a higher New Zealand dollar.”

Comforting words indeed for the Kiwi!

Top News This Week

New Zealand Building Consents. Friday, 3 June 2011, 6.45am. I expect a figure of 3% (previous figure was 2.2%).

USA Non-Farm Payrolls. Friday, 3 June 2011, 8.30pm. I expect a figure below 200,000 (previous figure was 244,000).

Trade Call

Buy NZD/USD at 0.8105

On the 4-hourly chart, NZD/USD has broken a key resistance at 0.8095. We will go long once prices retrace and enter into a range. Our entry is taken once prices turn back up from the conversion level.

Entry is at 0.8105 and our stop loss is placed 50 pips below the entry price. We will have 2 profit targets on this trade.

Entry Price = 0.8105
Stop Loss = 0.8055
1st Profit = 0.8155
2nd Profit = 0.8205