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NZD thrashed amid rising stagflation fears

Friday 6 May, 2022

Daily Currency Update

The New Zealand dollar fell sharply through trade on Thursday, giving up post FOMC gains as a broad-based risk off move and elevated stagflationary fears enveloped markets. Having traded above 0.6550 the NZD tracked marginally lower through the domestic session, before plunging back through 0.65 and 0.6450 US cents marking an overnight low at 0.6398 before finding support. Rising pessimism surrounding the outlook for global growth prompted heightened risk aversion driving commodity currencies lower. A collapse in Chinese Caixin services data in April and an extension of lockdown protocols in Shanghai, coupled with fears Beijing will soon follow, forced the CNY to resume its downtrend allowing the USD to mark 18-month highs, while dragging the NZD lower. There are real concerns China’s Covid protocols and the sustained lockdown of major cities will prompt a return to the early days of the pandemic where the services industry was crippled and manufacturing ground to a halt. With global supply chains already stretched, extended lockdowns will extend inflationary pressures and potentially delay a recovery to pre-pandemic economic activity. With little of note on today’s domestic ticket, our attentions turn to US labour market data where we expect a robust uptick in job creation and a decline in the underlying unemployment rate, while a raft of Fed policy makers are due to speak.

Key Movers

The US dollar regained the upper hand through trade on Thursday, asserting itself as the leader among major currencies. Having recouped the post FOMC losses, the DXY dollar index surged to a 20-year high as elevated risk aversion and concerns global growth will grind to a halt through the second half of 2022 weighed on investors. US rates surged, recouping the post FOMC sell off as investors re-assed Powell’s comments. Having initially accepted Powell’s dismissal of a 75-basis point hike, as dovish the promise of a series of 50 basis point hikes appears now satisfactory in meeting markets hawkish expectations. With inflation concerns among investors elevated, equities and risk assets have born the brunt of the correction. Having thrashed commodity currencies the USD forced the euro back below 1.06 and recovered recent gains against the yen, pushing above 130, while the pound suffered some of the heaviest losses down more than 2%, matching the weakness seen in the AUD and NZD. Having opened above 1.2625, sterling plunged toward intraday lows at 1.2325 following the Bank of England policy update. The MPC raised rates by 25 basis points as expected, yet offered a guarded and cautious guidance on future policy changes. With future rate hikes now questioned and the domestic economy grappling with extreme levels of inflation and lackluster growth outlook, prospects for the GBP appear bleak.

Expected Ranges

  • NZD/USD: 0.6380 - 0.6550 ▼
  • NZD/EUR: 0.6020 - 0.6180 ▼
  • GBP/NZD: 1.8950 - 1.9420 ▼
  • NZD/AUD: 0.8980 - 0.9060 ▲
  • NZD/CAD: 0.8280 - 0.8350 ▲