- NZD/USD holding steady in early Asia, COVID-19 chips away at risk appetite.
- Volatility is here to stay which should equate to US dollar strength.
NZD/USD is currently trading at 0.5914, stuck in an early Asia tight range of between 0.5914 and 0.5920 as bulls protect a support structure while patient opportunities wait for their next valid entry point. However, with the COVID-19 crisis fluid, whatever optimism there maybe for there being a light at the end of the tunnel could quickly be met with a harsh dose of reality for the dollar bloc currencies.
The bird has suffered in the wake of a dash for cash in recent weeks and tighter USD liquidity while New Zealand set’s the nation to Alert Level 4 lockdown for at least the next few weeks in an attempt to save lives and benefit the economy in the longer term. Also, the RBNZ began its QE bond-buying programme last week, helping soothe markets, in unison with a global pact to ease financial pressures and provide more scope to up the fiscal response.
Meanwhile, as for data, the preliminary trade data released by Stats NZ has been encouraging, as noted by analysts at ANZ Bank, who explained that Feb +3% higher than last year and Mar +0.5% on last year, somewhat validating the food exports thematic. “However, the mega funding task that the Crown now faces (the Q2 tender programme calls for $17bn in funding) has weighed on the market just as some in Europe are talking Sovereign Debt Crisis Mark II.”
A reality check in the pipeline for the dollar bloc
As far as the dollar bloc currencies go, the NZD has been one of the most resilient, likely due to the loonies close correlation to oil prices at rock bottom and AUD’s closer relation to China, trading as a more sensitive proxy. AUD/NZD has been sliding from around 1.05 to around parity in mid-March and analysts at Westpac argued that allies in the cross will be difficult to sustain multi-week as COVID-19 news is sure to worsen. This is where the risk lies for the dollar bloc currencies. COVID-19 is fluid and volatility is here to stay which means a stronger US dollar by default.
As for AUD/NZD’s recovery, “yield spreads have actually moved in AUD’s favour in recent weeks, with the RBNZ having to cut its cash rate -75bp versus -50bp for the RBA and markets having already been priced for a 0.25% RBA cash rate, albeit later,” analysts at Westpac added.