[INFINOX] NZD decline shows that COVID risk remains for major forex.


Introduction

Moving into this week the speculation was that the Reserve Bank of New Zealand was ready to become the first major central bank to increase interest rates in the post-pandemic era. Just one case of COVID infection in Auckland later has sent fear through markets that this rate hike may not now happen. This is having a key impact on the Kiwi dollar and other commodity currencies are also under pressure.


The question is, have the hawks been too confident?

  • COVID has resurfaced in the country known as being extremely strict on infection controls

  • This puts into doubt the potential for a rate hike from the RBNZ

  • Markets are reacting with New Zealand assets have been sold off today

  • The Kiwi is falling towards key support. The Aussie and Canadian dollars are already breaking key levels.


New COVID case in New Zealand

Throughout the pandemic, New Zealand has been able to keep tight control on COVID-19 infections and deaths (just 2,600 confirmed cases and 26 deaths). Until today’s announcement of one case of infection in Auckland (the country’s highest populated city), the last case of community infection was back in February.

The government has been extremely quick to respond to previous infections, putting cities into lockdown to restrict the potential for spread. Prime Minister Arden has already threatened a lockdown response if the delta variant has found its way into the country.

So there are big question marks over whether this is an isolated event. As has so often been the case with COVID, it seems unlikely that this will be a one-off event. This raises the prospect of renewed lockdown restrictions.


RBNZ rate hike now in doubt

This all comes a day before the Reserve Bank of New Zealand has been expected to increase the interest rate by +25 basis points to take the steam out of an economy that has been heating up recently.

According to Bloomberg, swaps data shows that traders have cut interest rate futures positioning suggesting the probability of a rate hike has fallen from over 100% yesterday to now less than 80%.

New Zealand bond yields falling sharply, NZD too

Markets that had been positioning for a rate hike from the RBNZ are having to dramatically re-position. The result of this has been for New Zealand assets to fall sharply.

The New Zealand 10 year bond yield is -12 basis points (-0.12%). It now means that the Kiwi dollar is also significantly lower. Whilst the key support of $0.6875 is intact on NZD/USD, the bulls will still be OK.



However, this will significantly open markets to volatility in NZD in the coming days. If the RBNZ now does not increase rates, this would still be a big surprise and NZD would fall even further. Equally though, a jump back higher in the NZD could also be seen if they do hike. In short, there is uncertainty on both sides to create elevate volatility to whatever happens.


AUD and CAD are also under pressure

This deterioration in the Kiwi is reverberating across the major commodity currencies. We spoke yesterday of the ranges these currencies were stuck in versus USD. It seems that they may be now breaking negatively.

If New Zealand is not going to hike interest rates this month because of COVID, this is also reflecting poorly on the outlook for hikes by the Reserve Bank of Australia and the Bank of Canada. Declining risk appetite and sympathy sell-offs have broken key levels on AUD/USD and USD/CAD.


AUD/USD has broken below 0.7290 support today. A decisive close below would be a key break and essentially complete a range breakdown -120 pips of further downside (with renewed downside potential on momentum too).



We are also seeing USD/CAD breaking higher through resistance at 1.2605. We are also seeing momentum renewing upside traction in the move which could suggest a path back towards the high at 1.2806 again.


Conclusion

Just one infection of COVID is causing markets to re-evaluate their expectation of RBNZ tightening. This is impacting not only NZD but also other commodity currencies too. With the RBNZ decision on monetary policy in the next 24 hours, we can expect a choppy ride in these currencies.

 

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