NZD tumbles amid rising risk aversion and fresh USD highs

Daily Currency Update

The New Zealand dollar fell to new year-to-date lows through trade on Thursday as markets maintained a firm risk off mood. Fears the global economy is poised to tip into recession, as the sustained conflict in Ukraine heaps pressure on Europe’s energy crisis, China’s Covid-zero policy hampers supply chain productivity and central banks begin aggressively hiking interest rates, all weigh on investors, prompting an evaporation of positive sentiment. The NZD plunged below supports at 0.6280 to mark fresh intraday lows at 0.6220. Having pushed back above 0.6350 US cents through trade on Wednesday the NZD plunged on the heels of a sell off across key commodities and risk assets. Equity markets tumbled while copper, iron and other key metal exports all tested new lows. Fresh fears Beijing will soon be plunged into lockdown sparked concern supply chain disruptions will only worsen in the months ahead. Despite assurance from Chinese officials they will provide the necessary fiscal stimulus to revive the economy, the CNY came under renewed pressure as the USD moved toward a 20 month high, dragging the NZD down with it. Added pressure came as markets pared back expectations for NZ interest rates following a smaller than anticipated jump in inflation expectations. 2-year inflation forecasts edged marginally higher through Q2, easing some pressure on the RBNZ to accelerate the pace of rate hikes and bringing expectations for OCR pricing back below 4%. With some commentator pricing in a 75-point rate hike this month the softening in inflation has prompted a correction across the yield curve, with investors now leaning toward another 50-point hike.

With little of note on today’s macroeconomic ticket our attentions remain with risk sentiment. We expect the NZD will remain vulnerable to further downward pressure through the near term.