How the Markets React When They Reach the Maximum Capacity
On August 28th 2016, I published an article on The Markets’ Maximum Capacity and focused on NZD/CAD market’s reaction to the 0.9776 and 0.9574 resistance levels. Please read it here: The Markets’ Maximum Capacity
NZD/CAD has been struggling below and sometimes around the 0.9776 and 0.9574 resistance levels since that article was published.
Something is going on NZD/CAD monthly chart, is not just a small price reversal. It seems the whole economy of both countries wants to reverse.
NZD has been going up against CAD since 2009.02.01. There is a continuous and strong uptrend formed on the monthly chart (below). There were thousands of parties that have been working under the shadow of this market (economic condition), and have been making money and profit with it for several years.
Many of them know nothing about what is happening on NZD/CAD monthly chart. What they know is that they want to keep their businesses up and running and make more profit. But the question is whether the New Zealand and Canada economy allow them to do that.
I am not saying there is another party which is against the other parties to keep on working and making money. It is just the economy capacity which is limited and has to be reversed somehow.
To keep on making money under such a condition, the business owners have to make some changes, otherwise they won’t be able to survive.
The price of a commodity, be it a currency, a metal, and… can’t keep on going up forever. It will reverse finally.
How and why?
Let’s say Canadians invest in New Zealand in different markets like the real estate. To do that, they have to convert their own currency (CAD) to New Zealand dollar (NZD).
Canadians have been happy with their investments and economic activities in New Zealand during all these years and they have been making reasonable profit.
However, the NZD price also has been going up against CAD because it was the Canadians who kept on buying NZD against CAD and the other currencies they probably had. The higher the NZD price went, the harder it became for the Canadians to keep on investing in New Zealand.
In spite of this, there are always strong investors who kept on doing what they had been doing during all these years, and they made the NZD price go higher and higher.
At a certain level, New Zealand central bank will have to decide to stop this uptrend because (1) it does know that this process can stop the investors from investing more in their country, and (2) an expensive currency causes inflammation in different markets including real estate and it can cause a lot of discomfort for those of their own people who have been waiting for the prices to become stable to buy a house or a commercial property.
Based on the economic scales that the governments have, the currency price reaches to such a level exactly where the NZD/CAD has reached which is around the 0.9776 and 0.9574 resistance levels.
Still many of the investors aren’t realized and try to invest more. That is why last month NZD/CAD attached the 0.9776 and 0.9574 resistance levels very strongly.
The NZD/CAD will keep on going up if one of the New Zealand and Canada or both, change their policy and do something different than what they have been doing since 1997 and before (see the below chart).
What I explained above is not a prediction. It is just the description of the an ordinary economic process.
On the monthly chart, NZD/CAD is forming a strong short trade setup now.
Good luck 🙂