New Zealand dollar soars on risk appetite

US dollar retreat continues

The New Zealand dollar is enjoying a banner day. NZD/USD has jumped 1.14% and is trading at 0.6224, its highest level in two weeks.

The US dollar continues to retreat across the board, as the greenback remains in a downward correction. The dollar index continues to fall and is at 106.62, down 0.70%.

The markets are showing more appetite for risk, ahead of the FOMC meeting on July 27^th. We have seen plenty of fluctuation in the pricing of a 75bp vs. 100bp move by the Fed. Currently, the markets are betting on a 75bp increase, even though strong US retail sales last week could bolster the argument that the economy can withstand a 100bp move. The FOMC is currently in a blackout period and last week’s comments from FOMC members Bostic and Bullard in favor of a 75bp move appear to have gone a long way to convince the markets that the Fed won’t go with a massive 100bp hike. This has reduced appetite for the US dollar and risk-related currencies like the Australian and New Zealand dollars have made the most of stronger risk sentiment.

Despite this week’s gains, the risk for the New Zealand dollar remains tilted to the downside. The RBNZ has raised rates aggressively, bringing the cash rate to 2.50%. With inflation rising to 7.3% in Q2, (6.9% prior), the central bank is likely to keep raising rates. Even so, NZD/USD has fallen around 10 per cent since the central bank began raising rates in October. Global growth is expected to fall and domestic demand will likely slip if the housing market continues to cool due to higher rates.

The RBNZ is expected to continue to raise rates, but the Fed could be even more aggressive than the RBNZ in the coming months, which means that the US/New Zealand rate differential will widen and the kiwi, putting more pressure on the New Zealand currency. This paints an unfavorable picture for the New Zealand dollar, which could fall below the 60.00 line in the third or fourth quarters.

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NZD/USD Technical

• NZD/USD is testing resistance at 0.6212. Above, there is resistance at 0.6269
• There is support at 0.6137 and 0.6080

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