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  • Recent trade has been choppy and saw NZD/USD come within 10 pips of annual highs at 0.7172 before backing off.
  • The pair has been supported by a broadly weaker USD, but a recent drop in global equities might give the buck some impetus.

Price action has been choppy across markets in recent trade; NZD/USD hit highs at 0.7164 in recent trade, less than 10 pips from annual highs set earlier on in the month at 0.7172, only to swiftly reverse back to 0.7150. At present, the pair is up 0.8% or around 60 pips and is the best performing G10 currency. Choppiness comes as the US dollar index swings either side of the 90.00 level amid a sell-off in US and European equities since the start of the US trading session.

No catalyst, in particular, has driven the choppy conditions, but a few things to note; regarding stock markets, US and a number of major European bourses opened at all-time highs and are likely to be seeing some profit-taking, while month, quarter and year-end portfolio rebalancing flows are likely to be distorting trade across all asset classes. Remember that with many European and North American participants still away for Christmas and New Year’s holidays, volumes are light and market depth thin, meaning sporadic volatility is likely. Recent swings in equities and the dollar are thus unsurprising.

NZD/USD traders will be keeping their eye on whether the NZD/USD can match or even surpass annual highs and perhaps advance towards the 0.7200 level. Above here, there is little by way of notable levels of resistance until 0.7400; the pair spent most of late-January to mid-April 2018 rangebound within 0.7200-0.7400. It will be interesting if NZD/USD can penetrate and re-enter this past range.

Eyes on US stimulus, but Asia developments also in focus

The main driver of FX market sentiment this week has been US fiscal stimulus. Forgetting recent downside in US equity markets that has seen Tuesday’s gains largely erased, markets have been in a fairly risk on mood after US President Donald Trump changed tac and opted to sign Congress’ $900B Covid-19 aid bill and $15T government funding bill into law. Congress might also pass an additional $1400 in direct payments to each American to go on top of the $600 already in the Covid-19 aid bill, something which US President Donald Trump supports.

Market are very much of the mind that more fiscal stimulus equals better US and global growth in 2021, which is likely to drive further gains in US equities and further downside in USD; small, open, export-dependent economies the likes of the New Zealand, of course, stand to benefit disproportionately from more favourable global trade conditions, hence why NZD has greeted the news positively thus far on the week (is up 0.6% vs USD).

Asia developments also remain in focus; namely, the path that Aussie/Sino and US/Sino relations take over the coming weeks and months as the Biden administration takes the helm of US foreign policy.

Looking ahead for the kiwi dollar, global themes will remain in the driver’s seat, though of course when macroeconomic data starts being released again in January 2021, markets will be interested to see how the New Zealand economic recovery is progressing. Another theme to watch in 2021 will be whether the New Zealand Government’s “red pill” realisation that ultra-accommodative monetary policies at the world’s major central banks (including the RBNZ) has generated enormous house (and asset) price inflation; will they push for the RBNZ to also bring house price growth under control (which would primarily require higher interest rates)?