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  • NZD/USD has rallied on Wednesday amid risk-on/a weaker USD but has failed to get above 0.7100.
  • Confirmation of a Brexit deal might be enough to push the pair convincingly back to the north of 0.7100.

NZD/USD has seen healthy gains on Wednesday amid risk-on/notably softer USD conditions, but the pair has thus far been unable to convincingly reclaim the 0.7100 level. At present, NZD/USD is about 50 pips or 0.7% higher on the day.

Risk on as markets bet Brexit deal will be reached

More than anything else, NZD has on Wednesday been the beneficiary of a broadly risk-on feel to global financial markets. News that the EU and UK seem to be on the cusp of announcing a Brexit deal has propelled GBP to the top of the G10 FX rankings but has also given other risk assets a lift, given that if a deal is reached, a chaotic no-deal end to the transition period will be averted.

At present, the S&P 500 trades with gains of around 0.6% and the Dow is up about 0.8% (the Nasdaq is flat). European equities also made solid gains, with the Stoxx 600 closing up 1.0%. Commodities are also sharing in the exuberance; front-month Brent and WTI futures contracts are higher by more than 2% apiece to above the $48.00 and $51.00 levels respectively. Industrial metals are for the most part higher. Precious metals are also higher, with spot gold up 0.7% and trading in the $1870s and spot silver up nearly 2.0% and trading in the $25.60s, though this is more of a function of USD weakness as opposed to anything else. On which note, safe-haven USD is the G10 underperformer and CHF and JPY are also doing poorly. Meanwhile, bonds are being sold with yields up in Europe and the US, and the US treasury curve notably steeper (nominal 10-year yields are up 3.7bps and the 2s/10s spread up 3.3bps).

What next for NZD?

In terms of what lies ahead for the kiwi; risk appetite and USD dynamics is set to remain the dominant determinant of NZD/USD price action, with no further important economic, government or central bank events scheduled for the rest of the year.

The pair might see further strength in case a Brexit deal confirmed, which might be the push the bulls were looking for to get NZD/USD back above 0.7100 and testing recent highs in the 0.7170s.

Failure of the US political system to pass a stimulus deal this year is a tail risk (US President Donald Trump is at the moment threatening to veto the current agreement). However, US President-elect Joe Biden will be taking the reins of government in late-January and is guaranteed to sign off on any stimulus bill put on his desk, so traders are not too concerned at the moment. Kiwi is thus likely to remain supported.

Perhaps a bigger risk to NZD/USD might be a further worsening of the Covid-19 situation in Europe or elsewhere, after news of a mutant, more transmissible strain spreading in the UK (as well as a mutant strain being detected in South Africa) sparked alarm at the start of the week. For example, imagine if current vaccines are found not to be effective against the new strain(s). That would be a massive setback (say goodbye to the strong 2021 growth rebound narrative), and the likes of NZD/USD could be crushed – note that scientists think this is VERY unlikely, however.