NZD/USD sees sharp 100+ pip reversal as bad data, rising US yields, risk off all hurt kiwi
- NZD/USD is now trading not far from 0.7150, having dropped from APac levels of above the 0.7250 mark.
- Bad NZ GDP data, rising US government bond yields, a risk-off market tone and lower crude prices all weighed.
NZD/USD sold off sharply on Thursday, reversing back from Asia Pacific highs above 0.7250 all the way to lows around the 0.7160 mark, a drop on the day of about 1.0% and a session high to low reversal of more than 100 pips. That means all of Wednesday’s post-FOMC gains have been wiped out. The pair is now only trading very modestly above lows of the week in the 0.7150s. A break below this would open the door to a move back towards monthly lows just above 0.7100.
Driving the day
Downbeat New Zealand Q4 2020 GDP growth data released during Thursday’s Asia Pacific session seemed to hang over the kiwi for the whole session and, by the close of Thursday FX trade, the kiwi was one of the worst-performing currencies in the G10. The main driver of the drop in NZD/USD, however, came from the USD side of the equation, with the buck broadly boosted by a surge in US government bond yields and a sharp sell-off in energy markets.
Starting with the former; US 10-year yields at one point eclipsed 1.75% on Thursday, a more than 11bps rally on the day at high points. Importantly for the dollar, the move was mostly driven by a sharp rise in real yields rather than inflation expectations. The move higher in yields not only helped USD via the channel of rate differentials, but it also spurred risk-off sentiment in other asset classes (i.e. higher yields weighed on stocks), thus increasing the demand for safe-haven currencies (like USD), at the expense of risk-sensitive currencies (like NZD).
Turning to the drop in crude oil prices; market commentators cited 1) profit-taking, 2) bad pandemic news out of Europe (France just announced tougher lockdown restrictions for the next four weeks, joining other countries as the EU struggles with rising infection rates and a bumpy/slow vaccine rollout) and 3) a moderation of oil “super-cycle” chatter as driving Thursday’s sharp drop - WTI cratered around 8% to under $60.00, its sharpest fall since summer 2020. This also helped the buck and hurt the kiwi.
One theme to keep an eye on, particularly for Asia sentiment-sensitive currencies such as the antipodes (AUD and NZD) over the next 24 hours is talks between high-level US and Chinese officials in Alaska. A two-day meeting of officials just begun and, as expected, US Secretary of State Anthony Blinken has told Chinese officials that the US is committed to strengthening the international rules-based order and has warned Chinese officials that the US will be raising the issues of; China’s oppression of the Uyghur Muslims in Xinjiang, China’s undermining of Hong Kong’s autonomy, the recent uptick in military posturing and aggression towards Taiwan and recent malicious Chinese cyberattacks on US companies and institutions. Chinese press reported earlier in the week that China will ask the US to reverse the trade policies of the Trump administration, but the US is very unlikely to give away this leverage so easily and, according to Chinese political observers, Friday’s talks are not expected to mark a significant turning point for US/Chinese relations.