NZD outperforms as NZGB spreads help fuel demand

Daily Currency Update

The New Zealand dollar outperformed through trade on Monday despite a broadly stronger US dollar as month end rebalancing and elevated demand for NZ government bonds helped fuel demand ahead of a slew of headline risk events. Having tested a break below US$0.58 the NZD staved off any meaningful and consolidated downturn amid an uptick in demand for domestic bonds. The sustained hawkish undertone adopted by the RBNZ has helped support the NZD through October, maintaining wider rate spreads at a time when other major central banks are beginning to taper hawkish expectations. With the currency showing signs of decoupling from the Chinese yuan as a proxy among the majors the overnight correction in the CNY had little impact on NZD value. China’s PMI data was weaker than anticipated as the pursuit of Covid-zero continues to cramp economic momentum.

Our attentions turn now to the RBA policy update ahead of this weeks all important Federal Reserve and FOMC policy meeting. Having enjoyed sustained support through the last two weeks amid rising expectations of a Fed pivot there is scope for a USD rebound. Sustained strength across the US labour market and persistent inflation should embolden policy makers to maintain the current pace of rate adjustment. The Fed’s forward guidance will be critical in determining direction, any push back on the promise of a tapering in the tightening schedule will force the NZD back toward $US0.56 and $US0.55 cents.