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Hawkish Federal Reserve and risk off bias drive NZD lower

Monday 20 December, 2021

Daily Currency Update

The New Zealand dollar retreated through trade on Friday giving up all the post FOMC gains, amid a risk off bias and hawkish Federal Reserve commentary. Markets looked toward risk assets amid fears the Omicron Covid-19 variant will derail the global economic recovery, following reports the Netherlands will introduce immediate public health restrictions, while the UK announced plans to re-impose lockdown measures after Christmas. While hospitalisation rates remain lower than those seen in other waves the sheer volumes of case numbers is beginning to place undue strain on health systems across Europe. Having slipped back below 0.68 US cents, the NZD and risk assets were dealt another blow when key Fed Policy makers suggested a rate hike could come as early as March next year. Analysts had previously priced in a policy change in June and the hawkish shift in Fed rhetoric helped fuel an uptick in 2-year bond rates, driving near term demand for the US and forcing the NZD back toward key supports at 0.6730. With little of note on the macroeconomic agenda this week we expect price action will be subdued, with fluctuations in the risk narrative driven by the evolution and impact of the omicron variant posing the greatest threat to price stability through the holiday season.

Key Movers

The US dollar, Japanese yen and Swiss franc enjoyed support through Friday as a risk off bias enveloped investors into the weekly close, prompting gains across haven currencies. Fears the Omicron variant will derail the global economic recovery, coupled with an accelerated and aggressive FOMC path to policy normalisation, helped drive the USD higher. The dollar index advanced over half a percent up 0.6% on the day, ensuring the losses suffered in the wake of Wednesday’s Fed policy update were recouped. The euro retreated back below 1.13 and 1.1250, while the GBP struggled to maintain supports above 1.32. With little of note on today’s ticket we look to the risk narrative for direction.

Expected Ranges

  • NZD/USD: 0.6690 - 0.6830 ▼
  • NZD/EUR: 0.5970 - 0.6030 ▲
  • GBP/NZD: 1.9530 - 1.9720 ▼
  • NZD/AUD: 0.9390 - 0.9530 ▲
  • NZD/CAD: 0.8630 - 0.8750 ▲