Market Overview

4 August 2021

The Kiwi Came into the Reckoning to Repeat the Loonie's Fate

The New Zealand Dollar, or just the Kiwi, according to the traders' slang term, could become the second of the major currencies to strengthen on a systematic basis after the Loonie, which is the Canadian Dollar. The last one has been embarking on a healthy path since the third week of April when the central bank of the country changed the size of the quantitative easing (QE) monetary program from $4 billion to $3 billion loonies per week, thus partly compressing the growth pace of the excessive money supply. 

The idea of printing less money for the needs of a recovering economy helped the Loonie to rise in price at that time by a total value of about 5% over the month of May. During the next six weeks, the USD/CAD dynamics did not have an unambiguous direction, and the Greenback managed to bounce almost to the previous technical levels, in line with moves in other currency pairs. But the comeback above 1.28 did not last long, and the quotes finally slipped to the 1.25 area by the beginning of August, probably confirming the medium-term trend reversal. 

A similar case may take place now with the New Zealand currency, after the country's central bank clearly hinted on Tuesday, August 3, that it may soon begin consulting on different ideas of how to tighten mortgage lending standards in order to limit a potential bubble on the housing market and to protect the new home buyers. But this seemed to be only the first step. Today a remarkable drop in New Zealand's unemployment rate, from 4.7% a month ago to 4.0%, was recorded. This is exactly the pre-pandemic level, and the recovering situation raised the market's expectations that even the refinancing rate hike could begin within two weeks, at the nearest meeting of the Reserve Bank of New Zealand (RBNZ), or at least at its next meeting on October 6. Meanwhile, the labour cost index rose by as much as 2.2% year-on-year and by 0.9% quarter-on-quarter, as the employment level happened to grow by 1.0% compared with Q1 2021. The expert community expected just 0.6-0.7% in addition to the previous employment indications.  

The very smallest consequence may be just the speculative activity on the forex market in anticipation of the actual RBNZ moves after the leak that some analysts at Bank of New Zealand declared: "The heat we've been hearing and warning about regarding New Zealand's labour market has been borne out... this surely removes any doubt about the (central bank) soon removing its foot from the accelerator." The Kiwi now is about 100 points higher than it was quoted at last Friday's close. The NZD/USD pair overcame the 0.70 technical and psychological thresholds and was trading near 0.7075 before European midday. 

It may fully follow up with an advantage to grow further, especially when the Australian Dollar is also rising against the Greenback on the wave of the Reserve Bank of Australia's message, which was sent yesterday to investors that the Australian financial regulator may decide if it will reduce the volume of bond repurchases in September, even despite indefinite prospects of new restrictive measures introduced in the country because of the renewed cases of COVID-19. 

In one form or another, but the market may hope in both cases for some earlier attempts to tighten monetary policy both in Australia and now in New Zealand then it could be done by the Federal Reserve in the United States or doubly so for the case of the European Central Bank and the Euro. Interest rates in Australia and New Zealand have always been historically higher than in other countries, which makes it a suitable  host for other reserve currencies. All of the previously mentioned may with a high probability, lead not only to an increase in both AUD/USD and NZD/USD above the 0.75 landmarks, but also to a gradual downward movement in the EUR/AUD and EUR/NZD pairs.

 

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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72.72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.