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Central Bank divergence emboldens NZD against key crosses

NZD - New Zealand Dollar

The New Zealand dollar held onto gains enjoyed in the wake of Wednesday's RBNZ policy statement, testing a break above 0.73 and a move beyond resistance at 0.7315. Another uptick in domestic rates across 5-year swaps and 10-year yields help bolster demand for the NZD as it continues to outpace US treasuries and maintain a yield advantage. With the RBNZ being one of a few central banks expected to raise rates before the middle of next year we maintain our bullish expectations moving into the second half of the year. While near term headwinds continue to weigh on upside moves a break above 0.7315 could signal a breakout toward year-to-date highs above 0.74. While steady against the greenback the divergence in monetary policy expectations has seen the NZD shift sharply higher against key crosses. Most notably the AUD. Breaking through resistance at 0.9330 the NZD/AUD now sits near 4-month highs at 0.9425.

Key Movers

The US dollar index maintained a narrow handle through trade on Thursday, disguising moves across key major units. The USD appreciated against the Japanese yen advancing over half a percent as month-end rebalancing and a rise in US 10-year treasury yields forced the yen toward 2-month lows. Having faltered on approach to 110 the USD fell sharply against the Great British pound after comments from Bank of England policymaker Vlieghe, wherein he intimated the economy could well be on track to accommodate a rate hike as early as Q2 2022. Sterling jumped through 1.42 to mark new three-year highs as the Bank of England now joins the Bank of Canada and RBNZ as major central banks pricing in a H1 rate adjustment. Assuming the economic recovery continues to gather pace higher yield returns should become more attractive bolstering demand for the GBP, CAD, and NZD as risk sentiment improves. Attentions today turn to key US inflation data. Inflation concerns have eased since April’s shock CPI print and a steady read today should help affirm assumptions inflation pressures are transitory and help drive gains across risk assets. A print above expectations will likely prompt a risk-off run as investors again adjust inflation expectations.

Expected Ranges

NZD/USD: 0.7250 - 0.7315 ▲

NZD/EUR: 0.5870 - 0.6020 ▲

GBP/NZD: 1.9280 - 1.9620 ▲

NZD/AUD: 0.9330 - 0.9450 ▲

NZD/CAD: 0.8720 - 0.8840 ▼