NZD resilient as tensions in Middle East elevate the risk-off narrative

Daily Currency Update

The New Zealand dollar surprised investors through trade on Monday, closing higher despite a broadly negative risk-off mood. Price action through trade on Monday was dominated by events in Israel and Gaza as conflict between Hamas and Israel escalated dramatically at the weekend, sapping market demand for risk.

Equities moved lower, oil prices surged, recovering last week's sell-off while bond markets and the USD received a risk-off boost. While the NZD traded lower through the Asian session, testing US$0.5950, it found support overnight surging back above US$0.6000 to settle near US$0.6015. Comments from Fed Vice Chair Jefferson seem to be the catalyst driving the overnight recovery and adding a floor under the NZD and equities.

Jefferson suggested the FOMC and Fed need to be careful and cognisant of tighter financial conditions in assessing future rate hikes. His comments helped drive rates lower amid expectations the Fed has now completed its tightening cycle.

Our attention remains on tensions in the Middle East as a critical marker of near-term risk demand. Israel Prime Minister Benjamin Netanyahu has promised retribution, declaring war and announcing “We are just getting started….we are going to change the Middle East”. Fears the conflict could spread have already been realised with Israeli forces engaging militants on the Israel/Lebanon border.

With the NZD already under pressure amid the broader risk-off narrative, the escalation in tensions will likely serve to dampen demand for any risk recovery. We expect the NZD will remain under pressure tracking between US$0.5880 and US$0.61.