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  • NZD/USD was on the front foot on Monday, rallying as high as the 0.7070 mark.
  • Risk on market conditions coupled with a weaker US dollar were the main drivers on Monday’s gains.

NZD/USD gained some decent ground on Monday, rallying from its 0.7010-0.7040ish range that had been in play since last Thursday to highs close to the 0.7070 level. At present, the pair is pulling back very modestly from these earlier highs, but continues to hold above 0.7050. That meant that NZD/USD managed to gain about 0.4% or close to 30 pips on the day. To the upside, the key area of resistance to take note of is around the 0.7000 area; in this area resides the January and early-March lows as well as the 21-day moving average.

Driving the day

With not much to update on down under, the kiwi took its cue from broader USD sentiment and risk appetite. USD suffered amid what was for the most part a very risk-on session. US equities partied, at least, with all the major indices gaining and the S&P 500 surging nearly 1.5% to record highs in the 4070s. Sentiment is being given a healthy boost by the string of strong tier one US data releases over the past few sessions; in chronological order, we had a blowout March ISM Manufacturing PMI survey last Thursday (the only negative was evidence of supply chain disruptions and shortages), a blowout March labour market report (916K jobs added to the US economy on the month versus expectations for 650K) and, most recently on Monday, a blowout March ISM Services PMI survey.

All point towards a US economy that is rapidly recovering in a bid to return to its pre-Covid-19 strength. As infection rates drop, the US nears herd immunity and the economy near-enough fully reopens over the summer, things are likely to only be getting better, hence the gains seen in stocks and risk-sensitive currencies. The only asset not to conform to the risk on was crude oil, which was weighed by supply woes (OPEC+ is gradually increasing production in the coming months) and amid concerns about non-US crude oil demand (i.e. record Covid-19 cases in India and lockdowns being toughened across developing economies and in Europe) – but this was not enough to spoil the party in equities and FX.

While the above-noted US economic optimism is likely to continue to be good news for US equity markets, it is questionable as to whether this will continue to weigh on the US dollar, as was the case on Monday. USD had a very strong month in March, despite the relatively decent performance in stock markets – that was because FX traders were increasingly buying into a narrative of US economic outperformance versus its developed market peers, a divergence that is increasingly expected to result in an ever-wider US rate advantage and a comparatively more hawkish Fed. In other words, if the US economy is doing better than say Europe, the UK, Japan and other major peers, US interest rates will be higher and the US central bank (the Fed) more hawkish.

Recent data ought only to strengthen this narrative. Perhaps another surge back to cycle highs in US government bond yields is what is going to be needed to turn the tide back in the USD’s favour. Long-term USD bulls might well be looking at the most recent pullback as an opportunity.