As the dollar continues, it's a downward spiral, risk-on currencies such as the New Zealand dollar have seen a rise in value. I have talked about how the market is slowly pricing in the long-term effects of the Coronavirus on macro-environments, and it seems like the Currency markets are gradually displaying this.
NZD/USD in Blue, CAD/USD in Teal, EUR/USD in Orange, GBP/USD in Red
The New Zealand Dollar is up 9.06% against the USD. However, at the same time, we see the Pound, Euro, and Canadian dollar only up 4.76%, 7.45%, and 5.35%, respectively. We can interpret the returns in the light of the Coronavirus and the respective geographical macro environment. The United Kingdom has been hit hard with the Coronavirus amongst battling with Brexit woes. Canada has had a relatively successful Coronavirus response, without having to resort to a strict lockdown, and Europe having hot spots of the pandemic, however, have had a cohesive response to the pandemic, coming up with a 750 Billion Euro recovery fund to fight the economic damage caused by the Coronavirus.
However, no nation has gone as hard and fast as New Zealand, going from citizens have relative freedom to lockdown in less than a week. New Zealand's relatively quick response may have come at an economic cost. However, it is similar to ripping the band-aid off as quickly as possible. This high initial cost may prove beneficial for the nation down the line, and the market is pricing this in accordingly with the appreciation of the New Zealand Dollar.
An increase in demand for the New Zealand Dollar may come from being one of the first countries to reopen their borders to foreign nations, with talks of an Australian bubble coming by the end of this year and a Cook island Bubble as soon as next month. Furthermore, as equities slowly price in the effects of the Coronavirus in the future, overseas investors may find New Zealand equities favorable.
However, investors should watch out for further rate cuts from the Reserve Bank of New Zealand, which currently hold interest rates at 0.25%. If the RBNZ continues to purchase bonds at the current rate they are now, they will run out of bonds to buy by the end of this year unless they lower their standard on the bonds they purchase. If not, they will have no other choice but to dip into negative rates.
Currently, the NZD/USD pair is consolidating in the 0.66 range. A push to 70c, a level not reached since June 2018, would require both an increase in demand for the New Zealand dollar and a decrease in demand for the US Dollar.