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Mark O' Donnell
 · 
Research Analyst
November 10, 2020
 · 

NZD/USD on its way to 0.74?

NZD/USD on its way to 0.74?

Are we going to see the NZD/USD at 0.74? With Joe Biden most likely to be the next President, many predict a de-dollarization to occur as the opportunity cost of investing in the United States is expected to decrease, placing pressure on the greenback downwards.

Dollar index down 10% from its March highs

NZD/USD - Countries are polar opposites

This pair is interesting, as both countries are on the opposite spectrum regarding their handling and current situations with the Coronavirus. In New Zealand, the Coronavirus is virtually nonexistent, with citizens having relatively no restrictions.

Prime Minister Jacinda Ardern showing the 4 Coronavirus levels.

In contrast, the Coronavirus in the United States continues to ravage the country, with cases yesterday topping 130,000. Biden promises to put the Coronavirus front and center, as he believes that the only way to a successful economic recovery is to eliminate the Coronavirus.

NZD/USD - Japanification?

RBNZ's government debt holdings reach similar levels as the Bank of Japan in 7 months as suppose to 3 years

However, both countries’ central banks have been on a quantitating easing spree to prop their respective economies. Research done by Bloomberg alongside data from the Reserve Bank of New Zealand shows that the RBNZ’s ownership of government bonds has risen from 6% to 37% in the span of seven months. Many compare this as a “Japanification”  in New Zealand, as the Bank of Japan underwent a similar process – only they started at 11% ownership, and it took them three years.

Fed's balance sheet went to 4 - 7 Trillion in 7 months

Similarly, with the Federal Reserve, Jerome Powell has taken the central bank from 5 Trillion in Assets to just around 7 Trillion, supporting the bounce bank in asset prices worldwide.

Governments are okay with debt, as long as they grow faster than their debt

In general, central banks and governments are okay with debt growth and can sustain large deficits for decades as long as GDP grows faster than the debt. Regarding New Zealand and the United States’ borrowing and their respective currencies, the ultimate strength is from the underlying recovery relative to one another.

As the United States’ recovery from the Coronavirus arguably has not started, investors and traders may look elsewhere to park their money.

In a broader sense, investment into the United States may be delayed/canceled due to the current Coronavirus situation or worse; investors may look elsewhere to park their investment.  This is where New Zealand comes into play. As the country is well underway in its recovery, investors may be looking at New Zealand as a place to park their capital.

A survey of 700 global business leaders by Bloomberg ranked New Zealand as the nation that has best handled the pandemic and where they would be most confident investing in. Furthermore, with negative interest rates predicted next year alongside tools to allow retail borrowing near the interest rates, alongside their positive effects most likely to be felt during a recovery, investors will inherit conditions that are most likely to be favorable for their investment.

NZD/USD - technically set for 0.74?

NZD/USD

As far as technical go, the NZD/USD is undergoing a possible head and shoulders on a longer-term timeframe, with the price level hovering around 0.68290, which is around a 100% Fibonacci retracement level. If net-investment into New Zealand is larger and faster relative to the United States, we may see the NZD/USD rocket price up to 0.74, not seen since the start of 2019.

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