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Surge in bond rates and risk off move forces NZD back toward 0.67

Friday 22 April, 2022

Daily Currency Update

The New Zealand dollar fell through trade on Thursday, giving up an extension above 0.68 US cents amid weaker risk appetite and a surge in global bond rates. Markets largely ignored domestic CPI inflation data as Q1 headline price pressures rose at a slower pace than broadly anticipated. Annual inflation failed to break above 7% and instead wrote in at 6.9% (still a 3-decade high). While the annualised rate missed the mark, core CPI jumped sharply, surging through 4% to touch 4.2% well above revised estimates at 3.8% and significantly above the RBNZ’s upper target of 3%. With markets already pricing in a 50-basis point hike next month the print did little to assuage investors' inflationary concerns and only firmed bets the RBNZ will tighten policy faster. Having tracked sideways through the domestic session, another surge in global bond rates and a flattening in global yield curves saw the NZD slip below 0.68 and 0.6750, touching intraday lows at 0.6730 before finding support. Direction remains driven by the resurgence in bond rates and shift in risk narrative. While appearing well bid on moves approaching 0.67, we expect the NZD will face near term headwinds as volatility across a cross section of financial assets remains elevated. Please note: There will be no commentary on Monday with the Anzac public holiday in Australia. Daily commentary will return on Tuesday the 26th of April.

Key Movers

Another resurgence in global rates and a softer appetite for risk prompted heightened volatility, as investors adjusted expectations following a string of commentary from key central bank figureheads. Fed President Powell continues to push the FOMC’s hawkish outlook, reiterating the strength within the domestic economy and an expectation inflation peaked in March. With a 50-basis point hike already priced in for next month, Powell’s comments only helped affirm investor expectations and drove a flattening in the yield curve as 2 and 5 year rates surged. Despite the resurgence in yields, the USD failed to extend its recent run against the yen and euro with both currencies holding firm.  Having succumbed to a swift and rapid correction through the last 3 weeks it seems markets have exhausted JPY selling pressure, at least for now, with the currency trading near 128.30 on the day. The euro surged back above 1.0935 following commentary from a number of key policy makers. Market expectations for monetary policy tightening have accelerated in recent months and comments from key officials helped fuel a surge across short end European bond rates.  A suggestion that the Asset purchase program will end in July, coupled with expectations rates will move above zero and into positive territory by year end fueled a euro uptick, before ECB president Lagarde offered a more measured outlook. Lagarde highlighted risks were skewed to the downside and while the ECB was set on normalising policy, it was not about to aggressively tighten rates as it battles to control burgeoning inflation expectations and zero growth. Our attentions remain with policy expectations and the response across global bond markets as we move toward the weekly close.

Expected Ranges

  • NZD/USD: 0.6700 - 0.6810 ▼
  • NZD/EUR: 0.6180 - 0.6280 ▼
  • GBP/NZD: 1.9180 - 1.9480 ▲
  • NZD/AUD: 0.9080 - 0.9180 ▲
  • NZD/CAD: 0.8440 - 0.8520 ▼