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Kiwi shifts lower as US dollar rallies on stimulus hopes

NZD - New Zealand Dollar

Much like its antipodean counterpart the NZD tracked lower through trade on Wednesday, again slipping back below 0.72 US cents as equity prices fell and risk demand faltered. Both the US and the UK recorded the largest number of COVID-19 related fatalities since the pandemic began, a shocking reminder that the worst is far from over and short-term headwinds remain very real. With concerns the pace of immunisation is not quick enough to deliver a H2 rebound, mounting risk sentiment is beginning to fade taking the sting out of the recent uptick.

While the NZD upturn relies heavily on the broader risk narrative we expect the currency will be relatively well-supported when compared with other major counterparts. New Zealand has done a remarkable job in curtailing the spread of COVID-19 and its domestic economy has rebounded much faster than initially expected. With monetary policy expectations no longer centred on a shift to negative interest rates and key trading partners also seemingly through the worst of the pandemic, we expect the currency to consolidate recent gains and trade between 0.7050 and 0.73 through the short term.

Key Movers

The US dollar advanced through trade on Wednesday, despite 10-year US Treasury yields falling 4 basis points and the Fed dismissing inflationary concerns. The dollar advanced across the board, bucking last week's trend and moving against treasury yield price action, instead buoyed by a shift in risk demand and a fall in equities, coupled with the promise of increased fiscal stimulus relief. With Democrats now holding an effective majority in both houses of government, it is expected an increase in income support from $600 to $2,000 a week will quickly pass through Congress. President-Elect Joe Biden is tapped to deliver an outline of his COVID-19 relief plan today, with expectations the Democrats will look to increase the current program significantly. A substantial stimulus platform could help add further upside support for the USD through the worst of the pandemic and prompt a shift in the medium-term outlook as a cushioned recession should run into a quicker recovery post pandemic. That said, as sentiment continues to drive demand a surge in appetite for risk led by equities could benefit commodity currencies and emerging markets. With price action faltering we are keenly watching direction through the next 24-48 hours as a possible marker of changes in the underlying narrative.

Expected Ranges

NZD/USD: 0.7120 - 0.7250 ▼

NZD/EUR: 0.5850 - 0.5930 ▼

GBP/NZD: 1.8880 - 1.9080 ▲

NZD/AUD: 0.9240 - 0.9330 ▼

NZD/CAD: 0.9070 - 0.9200 ▼