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Heightened US-China tensions weigh on risk and force NZD back toward 0.61

NZD - New Zealand Dollar

The New Zealand dollar drifted lower through trade on Thursday, weighed down by a shift in risk sentiment as tensions between the US and China escalate. Having tested a break above 0.6150 resistance forced the NZD back toward 0.61 marking intraday lows at 0.6106. Trump vilified China over its handling of the coronavirus, lashing out and suggesting their incompetence in managing the outbreak is the only reason the virus has spread so prolifically. In the same breath he denounced China’s new national security laws for Hong Kong, laws that could spark a fresh round of protests, suggesting the US will respond “very strongly” if the laws are enacted. In response China promised to safeguard its sovereignty and would retaliate if the US seeks to escalate tensions. The war of words has taken an alarming shift in recent weeks forcing investors to take stock as fears a renewed trade war will weigh on any short-term economic rebound.

The Kiwi also came under pressure as Fonterra lowered its forecast for milk prices, lowering its midpoint to 6.15, the lowest level since the collapse of dairy prices in 2016. The market had largely anticipated the soft print and while the report itself had a muted impact on the NZD, it highlights the vulnerabilities that lie ahead. With prices on key exports falling and long term interest rates at record lows, the attractiveness of the NZD as a yield play continues to falter. With expectations for growth across H2 souring, ongoing corrections in risk demand should weigh on the NZD through the medium term, perhaps prompting a push below 0.60 and 0.59 moving into June/July.

Attentions today turn to domestic retail sales data. With the country in lockdown for much of the last 2 months we expect a dismal print, with consumer spending on non-essential items plunging.

Key Movers

The US dollar advanced through trade on Thursday as escalating US China trade tensions prompted investors to adopt a more cautious tone as risk sentiment faltered. Despite another alarming uptick in unemployment claim filings the USD found support as the impacted of the global lockdown weighed on investors.

The Euro drifted back toward 1.0950 as optimism surrounding the Franco-German recovery fund proposal faded. Having jumped nearly 2% following the announcement earlier this week the combined unit struggled to maintain its momentum as fears US- China tensions will derail a short-term economic recovery. French, German and EU area services and manufacturing reports despite surpassing expectations, remain well below the level of expansion prompting investors to take stock and assess the broader impacts of the lockdown.

Attentions now turn to ECB policy meeting accounts for direction through trade on Friday. Investors will be keenly attuned to see if the ECB has amended its policy outlook following the German high court ruling earlier this month.

Expected Ranges

NZD/USD: 0.6020 - 0.6150 ▼

NZD/EUR: 0.5480 - 0.5620 ▼

GBP/NZD: 1.9780 - 2.0200 ▲

NZD/AUD: 0.9270 - 0.9360 ▲

NZD/CAD: 0.8490 - 0.8620 ▼