NZD Still on a High, but Risk of Correction is Looming

NZD Still on a High, but Risk of Correction is Looming

 Published: March 30th, 2022

The New Zealand Dollar (NZD) held its own among the G10 majors this week and rallied past a new technical milestone with further gains still possible. Despite the uptrend some analysts think the risk of downside correction is also on the rise.

NZD was slightly behind its commodity-currency cousins the Norwegian Krone and Australian dollar at the start of this week’s session but rose against all other majors in a rally that chipped away at two significant levels of technical chart resistance.

NZD/USD overturned more than half its decline from July 2021 on Monday 28th March after breaking through the 0.6922 level and achieving a 50 per cent Fibonacci retracement for the same period. It then went on to pass by another technical milestone at 0.6957.

In a note to investors, Australian investment bank Westpac said that NZD’s next target will be 0.7000 against the greenback. ‘As commodity prices rise further and continue to support the New Zealand Dollar, we believe 0.7100-plus could be achievable by July.’

The kiwi had already been performing well before American exchange rates dipped lower and gave it an added tailwind against the US Dollar, added Westpac analysts. Gains in agricultural commodity prices also provided a lift.

‘The next moves for NZD will hinge on geopolitical events. Higher prices for commodity exports and high outright yields will stay as essential NZD supports.’

Ukraine and grain

Agricultural commodity prices have risen sharply around the globe in recent weeks, driven by sanctions against Russia for its invasion of Ukraine and previous supply chain disruptions caused by the long COVID-19 pandemic. The kiwi has gained against that backdrop, while also benefitting from central bank interest rate policy.

The Reserve Bank of New Zealand’s (RBNZ) said in February that it expected to raise its interest rate even further than previously planned in order to cap domestic inflation pressures throughout 2022. That led many economists to raise forecasts for the country’s official cash rate.

Some local analysts, however, have been more reserved about New Zealand’s economic growth prospects and believe there is potential for the US Dollar to rise further in the near term.

Currency strategists at ANZ said in research note that the outlook for NZD is ‘somewhat clouded due to a number of factors including a housing slowdown, higher-than-expected interest rates and unpredictable commodity prices. Focusing on inflation, indications point to potentially much higher real rates. That includes America, where inflation is highest.’

‘Looking at previous historic situations where these factors were dominant, it's possible that the long USD rally may yet have a way to go’.

ANZ says previous parallels are especially relevant for the New Zealand Dollar after its recent outperformance and given that it has often been sensitive to shifts in US bond yields triggered by monetary policy at the US Fed.

'Forex traders may see current levels as an effective way to create defensive long-USD positions, particularly against European currencies. Markets are pricing in Federal Reserve rate hikes of around 100bp at the next two meetings, which may favour the dollar.’

Both NZD and AUD continue to benefit from their geographic distance from the Ukraine conflict and higher global commodity prices, ANZ analysts added.

The greenback was popular with speculative traders through its nine-month rally leading up to March 2022. It’s possible that the declines seen this week were set off by profit-taking in that section of the market.

Whether recent weakness in the American Dollar is the start of a trend change remains to be seen. Remarks from UD Fed Chairman Jerome Powell and other policymakers in recent weeks suggest America’s central bank could raise its interest rates more rapidly than suggested by the last dot-plot of Federal Open Market Committee (FOMC) members’ forecasts.

NZD still predicted to outperform

Last week (wc 21 March 22), the New Zealand Dollar was forecast to hang on to its dominant position in global currency markets, supported by bets that China's economy will continue to expand to the benefit of New Zealand.

NZD had been trending higher against all G10 peers since late February when Russia’s action against Ukraine began. With signs of peace nowhere in sight, analysts expect the trend could extend.

The GBP/NZD exchange rate tested new 2022 lows in the 1.9079 range in price action that suggested the markets were still bullish on the Kiwi.

Since the start of the Ukraine conflict in late February, NZD has been a standout performer thanks to supply chain uncertainty pushing up commodity prices in markets where New Zealand and Australia both have an advantage.

The long distance between Eastern Europe and the antipodean island nations has been a source of support and useful snapshot of how different currencies are performing in the disrupted geopolitical environment.

As the war rages on, recent trends could continue to influence forex markets strongly.

The New Zealand Dollar also found itself in bid last week when Beijing announced measure to support and expand China's economy, though worries over rising Covid cases in key cities like Shanghai could deliver headwinds.

Chinese Chair of the Financial Stability and Development Committee, Liu He, said in an announcement that China was committed to stability in equity markets and would implement measures by the end of the first quarter to protect economic growth.

Analysts at MUFG told Bloomberg that Liu’s comments provided ‘a clear statement of intent regarding policy support. FX traders need to stay abreast of developments in China as they unfold.’

Liu said long-term institutional investors should grow their equity positions, and said Beijing would stay in close communication with regulators in Hong Kong to ensure stability in the city's stock market.

NZD and AUD are highly correlated to what happens in China, thanks to strong trade links and growing dependence on the world's second-largest economy for their exports.

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