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.
Key Movers
Safe haven currencies were Monday's big winners as tensions in Israel and Gaza escalated at the weekend. The USD, JPY and CHF all received a boost early while the Canadian dollar and Norwegian kroner tracked higher on the heels of an uptick in oil prices and the GBP and euro suffered small falls. Having enjoyed early support the USD pared gains following comments from Fed Vice Chair Jefferson.Jefferson said the Fed is in a position to “proceed carefully in assessing the extent of any additional policy tightening”. The comments worked to elevate market expectations the FOMC has finished its tightening cycle, helping lift equities and force US rates lower, forcing the USD of the daily high.
Our attention remains on the conflict in Israel and Gaza, while a slew of Fed speakers should provide some further forward guidance as to future Fed policy decisions leading through Q4.
Expected Ranges
- NZD/USD: 0.5880 - 0.6050 ▲
- NZD/EUR: 0.5650 - 0.5750 ▲
- GBP/NZD: 2.0220 - 2.0480 ▼
- NZD/AUD: 0.9320 - 0.9420 ▲
- NZD/CAD: 0.8120 - 0.8220 ▲