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  • NZD/USD has rallied from last Friday’s lows and is above 0.7250, but remains far from recovering last week’s losses.
  • NZD is the beneficiary of strong risk-on flows which have lifted the S&P 500 more than 2.5% higher on the day.

NZD/USD has been rangebound since the end of Monday Asia Pacific trade, caught between 0.7220 (last Friday’s lows) to 0.7290 parameters for most of the session, though the pair has maintained a positive bias and looks set to close Monday trade with gains of about 0.5% or around 40 pips.

Monday’s recovery is only very modest in comparison to the selling pressure that NZD/USD came under in the last two days of last week; from the start of last Thursday’s European session to last Friday’s FX market close, NZD/USD dropped from multi-year highs above 0.7450 to as low as the 0.7220 mark, a 3.2% or nearly 250 pip turnaround in just two days. Therefore, it may sometime before NZD/USD is trading back at last week’s lofty highs again.

For now, the pair seems content to hold above its 21-day moving average, which currently resides at 0.7245. Should the pair drop below this level, even stronger support reside to the downside in the form of the 50DMA, which has provided strong support on three occasions since 28 January and not been broken under since the start of last November. The 50DMA currently sits marginally above the 0.7200 level and, subsequently, dip buyers are likely to be tempted to jump in the closer the pair comes to this level.

Driving the day

NZD (like AUD and CAD) is the beneficiary of strong risk-on flows which have lifted the S&P 500 more than 2.5% higher on the day (in tandem with similar gains across global equities). Now that bond market volatility has calmed down a little, investors have been able to refocus on positive developments to do with the pandemic and across the global economy; 1) Covid-19 infection rates are falling in unison across most of the globe and the general trend towards lockdown easing continues, 2) the US Congress is moving closer to passing US President Joe Biden’s $1.9T stimulus package into law (the House voted in favour of the bill on Friday and it now goes to the Senate) and 3) Johnson & Johnson’s Covid-19 vaccine was just given EUA in the US, meaning the country’s vaccine rollout will now further accelerate.

A negative FT report suggesting that the Brazil P.1. variant of Covid-19 evades the majority naturally acquired immunity from prior Covid-19 infection and, as such, may render the current batch of vaccines being rolled out less effective, has not dented sentiment. There is no definitive data to suggest that vaccines are less effective against the variant yet. That is a risk to watch out for, however. NZD and other risk assets could be badly rocked if vaccines do prove ineffective against the Brazilian Covid-19 variant (though most scientists still think it is unlikely the vaccines will be completely ineffective against it, it is more likely the vaccine efficacy will just be lowered).

Elsewhere, a very strong/very inflationary US ISM Manufacturing PMI survey for February might also be adding further reason for market participants to get long USD/JPY; headline ISM Manufacturing PMI number came in above expectations at 60.8 (expected was 58.8), its highest since September 2018. The employment subindex rose to 54.4, boding well for this week’s official US labour market report. New Orders rose to 64.8 from 61.1, in a sign of strong demand ahead. But the Prices Paid subindex shot higher to 86.0, its highest level since 2008. According to Capital Economics, “higher oil prices and the depreciation of the dollar are putting some upward pressure on US prices this time around too, but the scale of the rise in the ISM prices paid index goes well beyond what can be explained by those factors alone”. The economic consultancy continues that “the comments in the report also make it crystal clear that these shortages go well beyond just semiconductors, with firms in every sector reporting shortages and problems with suppliers keeping up with demand”.

Amid further evidence of the build-up of inflationary pressures following this latest ISM report, ING comments that they now “expect inflation to rise above 3.5% in the second quarter”. Though the Fed has said that this expected increase in inflation will not be sustained and thus does not warrant a policy response, ING thinks “there is a growing risk inflation could end up being a little stickier around the 3% mark given the prospect of vibrant, stimulus fueled demand coming up against a supply-constrained economy and businesses taking advantage to rebuild margins.” Thus, concludes the bank, though “the Federal Reserve tells us that they don’t think they will raise interest rates before 2024… we feel that this will be increasingly difficult to reconcile with the data… (and) mid-2023 looks increasingly likely to be the starting point for higher US interest rates”.

Looking ahead, USD traders have a busy week with the ISM Services PMI Survey for February on Wednesday, Fed Chair Jerome Powell speaking on Thursday and the official Labour Market Report for February on Friday. NZD traders, meanwhile, will be on the lookout for news regarding the discovery of any further Covid-19 infections in Auckland after the city went into a new 7-day snap lockdown over the weekend after one locally transmitted case was found. Terms of Trade data for Q4 2020 will also be worth watching and is set for release at 21:45GMT on Monday, while RBNZ Governor Adrian Orr will be speaking at 01:00GMT on Thursday.


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