This kiwi dollar’s performance against the dollar and versus its other liquid crosses is very different. Against the benchmark greenback, the high-yield currency has rallied to a near one-year high – though in a rather choppy ascent. Yet, when we set the New Zealand against currencies like the Australian dollar, euro, British pound or Japanese yen; we see that it has actually stalled or lost ground over the past weeks. That being said, most traders make reference to the kiwi dollar’s strength or weakness just as it is reflected in NZDUSD. This is selective bias; which is reasonable considering this particular pair is the most liquid of the kiwis-crosses. However, when we get lost in the performance of this one pairing; it is easy to miss an impending shift or to inaccurately assess the performance of the other crosses. If we were to take the greenback’s influence out of this question, we would be looking at a weakening currency. With that said, NZDUSD likely carries a considerable amount of the influence by keeping the single commodity currency higher than it should be otherwise. What then happens should this US currency find traction?
If the dollar starts to appreciation, the impact will echo across the markets – and not just the FX market. An advance for the US dollar would likely drag most of its counterparts down (with perhaps the exception of the Japanese yen and Swiss franc). A natural side effect of such a development would be a wholesale desertion of yield demand that will completely undermine the kiwi and its other high-yield counterparts. For this particular currency, however, such a shift would be more severe. Whereas the Aussie and Canadian dollars have otherwise steady economies, New Zealand has actually seen its pace slow with notable troubles in domestic consumption, growing housing sector instability and tremors in the banking system. What’s more, when the sheer demand for return (through capital gains) dissipates; the kiwi will be exposed for a significant lack of potential through future interest rate growth. New Zealand’s Prime Minister summarized this situation well when he said last week that he expects the currency will not fall even as growth and interest rate expectations slow. This is probably true – so long as risk appetite itself holds up. What could spark a collapse in self-sustained investor confidence? There are a number of potential catalysts; but the most remarkable driver would be one that sees a loss of faith in stimulus expansion.
When we evaluate the New Zealand dollar for its place in the bigger themes, we find that the currency isn’t on a rising interest rate track, the country isn’t engaging in what is now popularly coined a “trade war” and the nation’s policy officials have not taken meaningful steps towards easing policy. As for particularly catalysts, there are notable market movers that are generally grouped over two periods. Sunday brings the card spending report which is good for measuring consumer spending and lending conditions. More influential will be the wave of releases of housing sales, retail sales and business activity on Wednesday evening / Thursday morning. These will give a meaningful assessment of the country’s economic health and could help establish interest rate expectations.
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