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NZD fails to capitalise on Equity market recovery

NZD - New Zealand Dollar

The New Zealand dollar was forced to give up gains hard won through the domestic session on Monday despite improvements across equity markets. While commodity currencies fared better Monday when compared with the latter half of last week the NZD struggled to extend early gains beyond on 0.72 and drifted lower overnight as the US dollar advanced across the board. Gains across equity markets did not translate into upside for risk correlated currencies as analysis of key volatility indexes notes a divergence in movement across equity and currency markets. Having touched intraday highs at 0.7202 the NZD faltered to mark session lows at 0.7150 before support kicked in and forced the currency to track sideways into this morning’s open.

While last weeks correction in risk demand appears to be driven by the GameStop saga and a true retrenchment in risk is not yet evident there are cracks appearing. Yes, domestic data continues to support a faster than anticipated recovery and Yes, the country continues to squash COVID outbreaks in real time, however boarders will likely remain closed through 2021, depriving NZ of a key export in tourism while market focus begins to shift away from the 2020 risk on narrative. Demand for risk has shown little improvement through January 2021 and has infact eased as the wave of optimism following the US election, the realities of vaccine roll outs and concerns surrounding new COVID 19 strains begin to take their toll on investor optimism. We expect the NZD to remain well supported through the short term, however, gains above 0.72 and 0.7250 will likely remain hard won.

Key Movers

The US dollar led gains across currency markets advancing against all major currency counterparts propelling the Dollar Index toward its highest close in nearly two months. Faltering risk appetite and a correction in demand for the Euro and GBP helped drive US dollar gains. The Euro led declines as concerns the continents vaccine roll-out is falling further behind both the US and UK weighed on market sentiment and expectations the common market will enjoy a swift H2 rebound. With domestic data sets softening a break below 1.20 could eventuate in the weeks ahead.

Expected Ranges

NZD/USD: 0.7080 - 0.7220 ▲

NZD/EUR: 0.5880 - 0.5990 ▲

GBP/NZD: 1.8920 - 1.9280 ▼

NZD/AUD: 0.9360 - 0.9450 ▲

NZD/CAD: 0.9120 - 0.9230 ▲