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Month End balancing forces Kiwi to give up some of the months 6% appreciation

NZD - New Zealand Dollar

Having extended gains throughout the domestic session and early European trade, marking fresh 2 ½ year highs above 0.7050 the NZD retreated overnight, falling back toward 0.7015/10 amid month end rebalancing. The currency has clearly outperformed through November as risk on gains driven by vaccine optimism and adjusted domestic interest rate expectations saw the NZD appreciate over 6% through the month against the USD while testing 7-month highs against the AUD and 12 month highs against the Pound. The NZD found added support yesterday after ANZ business outlook survey showed strong activity gains while house prices surged through November, marking a 9.2% appreciation in 12 months. The faster than expected recovery in business activity and optimism coupled with rapidly rising house prices further cooled expectations the RBNZ will cut interest rates below zero in the new year. With markets now expecting the RBNZ will maintain an average baseline OCR at or near 0.15 the NZD has emerged as a popular carry trade amid the current low yield environment.

Attentions today remain offshore with little of note on the domestic docket. Despite yesterdays correction we expect the NZD will remain well bid, maintaining its momentum through a series of higher highs and higher lows.

Key Movers

The US dollar bounced off 2 ½ year lows on Monday amid souring risk appetite and a correction across equities driven by softer than anticipated US economic data. Home sales fell over 1% in October while factory output throughout the Midwest slowed through November as the region grapples with the effects of COVID 19’s resurgence. The Dollar index rose two tenths of a percent pushing back toward 92.0 before running out of steam. Despite yesterdays reprieve there is little expectation the worlds base currency is about to break the current long-term downtrend. The impacts of COVID19 and the Q4 retracement in economic activity coupled with the ongoing absence of fiscal support means the road to recovery will be much longer than first expected, suppressing monetary policy expectations well into the future.

The Euro opens marginally lower, slipping off 3 month highs and 1.20 amid month end rebalancing and expectations the ECB may intervene to suppress further gains. Having signaled it would carefully monitor the exchange rate to ensure a rapid appreciation did not impact Europe’s ability to recover from the impacts of the COVID19 pandemic, the ECB has opened the door to speculation it may use monetary policy to control any ongoing uptick. Having advanced 2.6% in November and with signs national lockdown measures are controlling the spread of the Virus there is an expectation with the introduction of a vaccine Europe will be well placed to enjoy a swift rebound in activity come 2021.

The GBP opens marginally lower amid ongoing extensions in the deadline for an EU/UK trade deal. After a period of intense talks, even a partial agreement is yet to be reached, prompting growing concern a hard exit will be the reality. While most anticipate an 11th hour compromise can be found, the year end deadline is fast approaching, limiting the time needed for any deal to be ratified. With hopes a deal would be reached last week gone our attentions turn to this week’s headlines.

Expected Ranges

NZD/USD: 0.6980 - 0.7050 ▼

NZD/EUR: 0.5820 - 0.5920 ▼

GBP/NZD: 1.8830 - 1.9120 ▲

NZD/AUD: 0.9505 - 0.9640 ▲

NZD/CAD: 0.9050 - 0.9150 ▲