NZD upside limited by near term COVID concerns
Monday 25 January, 2021
Daily Currency UpdateThe New Zealand dollar tracked a similar path to its antipodean counterpart on Friday, unable to hang on to weekly highs above 0.72, edging lower into the close. Risk assets found support through last week as markets adjusted expectations through the early days of the Biden administration. President Biden has already issued a series of sweeping changes, reversing policies enacted by the Trump administration. While Biden’s policies ordinarily may not support broader market upside in the current environment the diminishing risk to global trade, foreign relations and geo-politics coupled with the promise of ongoing tax incentives, accommodative monetary policy and increased fiscal stimulus have combined to elevate risk sentiment and help drive the Kiwi of lows below 0.71 US cents.
While we expect the NZD will remain elevated through the near term as risk demand and strong domestic fundamentals support the currency, upside beyond 0.7250 and approaching 0.73 will likely be hard won as near-term COVID 19 headwinds temper expectations. Delays with vaccine roll-outs, new COVID variants and the promise of national lockdowns in to the middle of the year have forced investors to re-assess growth expectations for 2021. With month-end rebalancing providing some upside opportunities we anticipate the NZD will fluctuate between 0.7080 and 0.7280.
Please note there will be no commentary tomorrow, Tuesday the 26th, with Australian markets closed in observance of Australia Day.
Key MoversThe US dollar tracked lower through last week after Biden signed a series of executive orders and memorandums reversing Trump Era policies and enacting immediate change across immigration, climate change, racial equity and pandemic response. Risk demand remains an important driver for near term USD direction and Biden’s changes coupled with a promise from Treasury Secretary Janet Yellen the new administration would not roll back the 2017 tax cuts and clear signals the Fed is committed to accommodative monetary policy and the world’s base currency struggled to gain any upward momentum as markets chased risk assets and commodity currencies higher through last week. That said with medium-term forecasts improving there is scope to suggest a H2 moderation in USD weakness is possible.
The GBP remains supported by the ongoing risk narrative, however recent data sets suggest the economy has been hit heavily by the third lockdown. December retails sales and January PMI’s both fell short of expectations and out expectations turn to unemployment and weekly earnings data Tuesday for a better insight into broader economic health. COVID has brought the UK health system to its knees and further evidence the economy is faltering could prompt a swift correction for Sterling. With restrictions now expected to be in place until the European summer the pound remains increasingly vulnerable to swings in risk demand.
We expect the Euro will remain range bound as the market theme remains relatively consistent. With near term pressure on the USD there is some scope for Euro upside, however we believe the single currency will struggle to push back toward December highs above 1.23. Growth across Europe continues to lag the US and with lock downs across the continent likely to be extended there is little hope the Eurozone will see any near term relief of growth concerns. Further divergence in expectations could see the Euro soften through Q2 and into the end of H1.
- NZD/USD: 0.7080 - 0.7220 ▼
- NZD/EUR: 0.5830 - 0.5950 ▼
- GBP/NZD: 1.8880 - 1.9220 ▼
- NZD/AUD: 0.9215 - 0.9370 ▲
- NZD/CAD: 0.9020 - 0.9180 ▲