The New Zealand Dollar against the U.S Dollar has been a good barometer for the state of risk-on assets. It currently sits at around 0.7195, with technicals showing a possible strong move in the future. We now see a flat bottom wedge forming, with the wedge's completion seeing the NZD/USD make a violent move to the upside.
Historically, the price is in an area prone to intense swings to the upside and the downside if we look left. A move to the upside may finally bring 0.74c on the table, while a break of the flat bottom wedge before completion may see a move back to 0.70c. However, New Zealand's fortunate spot in eradicating the virus may allow tailwinds to support the technical possibilities.
In the latter part of January this year, New Zealand's inflation numbers were better than expected at 1.2%, strongly surpassing analysts' forecasts of 0.2%. Jarrod Kerr, Chief Economist at Kiwibank in Auckland, stated that "the medium-term outlook for inflation looks stronger compared to just a few months ago." Like many analysts, Jarrod has reversed his viewpoint for more RBNZ cuts this year. This comes as many New Zealand retail banks such as ANZ and Westpac see that New Zealand's sharp recovery due to successful Coronavirus measures is likely to affect further rate cuts coming down the line. Both banks have retracted their rate cut predictions.
Analysts predicted a rise in employment in the past quarter, with the RBNZ predicting unemployment rising from 5.6% to 5.3%. However, with numbers showing a drop to 4.9%, any optimism in rate cuts has all but vanished. Capital Economics further emphasized their view that interest rates in New Zealand would rise from next year.
Both are no doubt positive for the New Zealand economy and its citizens. However, this will turn the New Zealand dollar into a missile. Stephen Toplis, Bank of New Zealand's head of research at Bank of New Zealand, stated that they are "formally building a rate hike [in their model] in May 2022" and that this may be "pouring fuel on the New Zealand Dollar that is already on fire." Many other senior economists are conveying the same viewpoint, with ASB's senior economist Mike Jones stating saying that the RBNZ's and fiscal stimulus "has done the trick, and no more is required."
With a surging house market, lower than expected unemployment, and higher than expected inflation, alongside favorable technical, the New Zealand dollar may be poised for a move upwards.
The New Zealand dollar against the U.S. dollar is facing a critical fundamental event tomorrow: RBNZ's Interest Rate decision. New Zealand has been fortunate that the government's decision to go "hard and fast" has meant citizens have had relative freedom through Christmas and New Years'.
The NZD/USD is currently sitting at around 0.732, up around 1.37% over the past week. Bulls are looking for positive signs to take the pair 0.74 and higher, such as a lifting in the extraordinary bond purchases the RBNZ is engaging in.
New Zealand was also in a fortunate position that many of the country's citizens could afford. A lockdown and was employed through the lockdown.
With a mix of government support alongside jobs that enabled work from home, many citizens were in a position to save during the lockdown periods. Pair this with the Reserve Bank of New Zealand, removing loan to value ratios to stimulate the economy, and we have a legendary demand and house price increases across the board as investors and first home buyers take advantage of easy borrowing.
However, the RBNZ has realized that the temporary lifting of the loan-to-value ratio has done its course. They recently announced that they would place these restrictions back, requiring investors to have at least 40% of the house price they want to purchase as a deposit.
Now, analysts are looking at whether the RBNZ will translate viewpoint into monetary policy. As it stands, analysts predict the RBNZ to hold rates as is at 0.25%. If so, it is likely to state that they will be willing to keep rates well into 2022. A sudden rake hike makes signals the RBNZ may be more bullish on the New Zealand economy. Stephen Toplix, head of research at Bank of New Zealand in Wellington, stated that the RBNZ "simply must be less dovish" than it was in November because inflation has portrayed a more robust.. economy than was expected."
To be clear, house prices and housing demand are not an exact bearing of economic growth. Nor is it a mandate for the Reserve Bank of New Zealand. However, rampant leveraging in higher loan-to-value ratios implicitly affects an order the RBNZ does preside over: employment. To RBNZ, riskier loans place higher pressure on borrowers to make higher payments, possibly putting them into a position of insolvency from the smallest change in their financial conditions.
NZD/USD - A pair to watch tomorrow.
This pair has been ranging in a consistent bound for the past seven or so years. If we have a look at a longer-term timeframe,
We can see that the pair has been ranging between $0.8 and $0.95, with a significant support/resistance area at 0.9. Currently, the price is just under 0.90c, at 0.899.
New Zealand has rallied on the government's consistent handling of the Coronavirus, and more recently, the RBNZ comments suggesting that negative rates are less likely to be on the table, implying a better than expected in the New Zealand recovery.
However, upbeat sentiment on a Pfizer vaccine before the end of the year has spiked a risk-on rally, especially in the Oil markets. The Canadian Dollar is known for its commodity correlation like the Australian Dollar, in which the CAD strengthens/weakens depending on the price of commodities like Oil. In the past five days, Oil has rallied over 7% on Pfizer vaccine's news. Oil rallying tends to strengthen the Canadian Dollar.
However, the Canadian Dollar has not strengthened against the NZ Dollar, with recent RBNZ's comments further strengthening the NZD. However, as we approach this significant support/resistance area, alongside further positive news on a Coronavirus vaccine before year-end, may end the Bull rally in the New Zealand dollar and heavily reject that 90c resistance level.
There is not much news following the Coronavirus situation in Canada. However, the country has experienced a recent Coronavirus spike due to its non-essential lockdown restrictions. The government faces a similar curve to that of the United States and in Europe.
Due to this, top deputy Carolyn Wilkins from the Bank of Canada stated that the country "is likely to exit the pandemic with a lower profile for potential output, leading to a significantly diminished ability to generate goods, services, and incomes on a substantial basis." She also states that "Canada's plan to lift immigration levels will boost potential output growth overtime."
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.
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.
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.
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.
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.
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.
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.
When all is well and good, Joe Biden is most likely to be the 46th President of the United States. We can finally put the election behind us and focus on the recovery of the economy stemming from the effects of the Coronavirus. Here is your week ahead.
The elections drew our attention in the past week. However, the Coronavirus continues to run rampant in many countries, including the United Kingdom. They recorded over 25,000 new cases on the 7t November, even after Boris Johnson implemented a 4-week lockdown. Bank of England Governor Andrew Bailey stated that the Central bank is considering other policy tools such as a path of policy and negative rates – however, it has no fixed order and time frame on when they will use them. He stated that “It will always be dependent upon the state of the world and the state of the economy.” Alongside Bailey’s speech, the UK is set to release its unemployment rate the day after, with analysts predicting an increase of the unemployment rate to 4.8%, up from 4.5% a quarter before. Furthermore, Brexit talks will continue this week, making the Cable an interesting pair to watch.
After beating the Coronavirus, China is well on its way to recovery. Economists polled by the WSJ protect the consumer price index will rise 0.75% from a year earlier, predicting a number that would be the weakest inflation reading in the past ten years. China has implemented strict Coronavirus rules in order to make sure the outbreak does not resurface. For example, schoolchildren in China must wear masks during the day, re-apply hand sanitizer, and have temperature checks three times a day. Ali Mokdad, a professor of Global Health at the University of Washington and a former official with the international health program at the Centers for Disease Control and Prevention, stated that china “have done an amazing job of controlling the virus.”
With Jacinda Ardern being elected Prime Minister, there is a general consensus that public debt will be set to increase as the government rampantly borrows in order to control the economic effects of the Coronavirus. New Zealand has generally been touted as one of the most successful countries in trying to eliminate the Coronavirus – however, it came at a great economic cost. The IMF forecasts that New Zealand’s economy is expected to fare much worse than most advanced economies, with GDP per capita is predicted to be lower in 2025 than in 2019. However, with most restrictions in New Zealand removed, many local businesses are back and operating. In October, a survey of 700 global business leaders by Bloomberg ranked New Zealand as the nation that has the best handled the pandemic and the market they would most confident investing in.
Many Central Bank leaders believe that negative interest rates are the most beneficial when the economy is recovering – and that’s what is currently happening in New Zealand. The average house price in Auckland sold for over $1 Million NZ, which means a surprise negative interest rate this week ahead; however, will most definitely send the NZ dollar downwards, which may boost economic activity.
With Joe Biden most likely taking the spot of the Presidency, markets can return back to a relative normal. It is a long recovery ahead for the United States, with Biden promising to prioritize eliminating the Coronavirus. Cases in the United States continue to run rampant, with cases reaching an all-time high at 126,000 on 7th November. It is to be seen whether Biden’s plans will materialize. With that said, the US CPI is stated to say the same at 1.7%.
The UK, Italy, France, and Germany are all experiencing second waves in their respective countries. This has forced many of them to enter a second lockdown, essentially locking in a “double-dip” recession, as CNN puts it. The European Unions GDP surged 12.1% between July and September, as restrictions eased all around the bloc. However, with restrictions coming back, these gains may be short-lived. Andrew Kenningham stated that “It is difficult to think of another occasion when such ‘good news’ will have so little to cheer” and that “the second wave of Coronavirus restrictions is about to push the single currency area into a double-dip recession”. With that said, analysts predict GDP figures to stay relatively equal at around 12.1%
Relatively quiet week ahead in comparison to previous weeks. Don’t forget to stay safe, and trade safe.
Congratulations, Joe Biden.
Similarly to the United States, New Zealand has its elections coming up in 25 days. What's the future of the New Zealand dollar once a party is enacted?
Generally speaking, there are two "main" parties in New Zealand – national and Labour. From a thousand miles away, National vs. Labour would be compared to Democrats vs. Republicans. National can be categorized as "pro-business' – Lowe taxes, fewer benefits. Labour can be known to people for having "socialist" policies – higher support for students, higher taxes for the rich, etc.
Therefore, if National wins, this would provide a push for the New Zealand dollar. Similarly, a possible push downwards if Labour wins.
The New Zealand dollar is currently sitting around 0.65, firmly rejecting that 0.68 cent level forming a double top before firmly falling. We can see that 0.68 cent level has been a healthy historical support/resistance level since 2016.
Therefore the question becomes, who is poised to win the election?
An article in the Financial Times regarded New Zealanders for their "humility" and their "[tendency] to view the mass Euphoria that characterizes US political campaigning with suspicion," suggesting that New Zealanders tend to steer their eyes towards the center-left Labour party.
The party leader of the Labour Party, Prime Minister Jacinda Ardern, has been praised for her empathic response to the horrific Christchurch Shooting, which killed 51 Muslims, a deadly volcanic eruption on Whakaari Island, and her handling of the Coronavirus.
On the other side of the aisle, we have the National Party with Judith Collins at the helm. Judith has been struggling with the National party's misfunction's initial tailwinds, having switched leaders three times in the past year. Judith Collins has been struggling against the popularity of Ardern lately. Their attack on the economic damage of Labours' "go hard, go fast" approach to totally eliminate the virus has been met with fierce criticism due to the public being generally approving the policy. To date, there have only been 25 deaths regarding the virus.
As of the current polls, Labour is set to win with a wide margin. 1 News poll showed yesterday that Labour was on 48%, with National party on 31% - this could see Labour forming the first single-party government since 1996 – the year New Zealand moved from the First past the post system to MMP.
In the United States, the difference between the constituents in Democrats and Republicans are quite polarizing. However, in New Zealand, the difference is not as great as that of the United States. Some even question whether National and Labour's policies are much different in the first place. If you look at their social media presence, they attach each other like what the other party is doing would destroy the country.
However, an article from the Spinoff, a news provider in New Zealand, summed up the politics between the two parties greatly – "How did we end up with two parties that are pretending to do things differently?" Hotelling's Law, created by Harold Hotelling in 1929, helps explain why this happens. In summary, both Labour and national policies end up near the middle, to appeal to the most voters, which is why they look very similar.
Therefore does it matter who gets into power if the policies are quite similar? In the long run, probably not. For New Zealanders? Again, probably not. But for the markets? Most likely, yes.
The New Zealand dollar has fallen against the US Dollar as New Zealand records new community transmitted cases since the last time 102 days ago.
After a rally in risk-on currencies, the New Zealand dollar has fallen over 0.75% over the past two days from its high from 0.6175 as the largest city in the country, Auckland, was put into a mandatory level 3 lockdown for three days. For reference, New Zealand uses a 4 level system, with four being the most severe of lockdowns imposing a mandatory stay at home order for all citizens, with only essential workers such as nurses and doctors allowed to work.
Level 3 is less severe; however, it still imposes mandatory work from home orders if it is possible to do so. Schools and restaurants are closed. However, takeaways are allowed. Furthermore, only gatherings of 10 are permitted, with police roadblocks around the Auckland area to catch people going in/out of the city.
Prime Minister Jacinda Ardern urges citizens not to panic and panic buy at the supermarkets. However, queues have been seen stretching out the door at many supermarket chains, with police being required to be present to control the crowd of shoppers.
In terms of the New Zealand dollar and New Zealand equities, this sell-off may be purely reactionary. New Zealand is doing far better than essentially every other country, including its bigger brother Australia. This may be a good time for bulls to enter the market. As we’ve seen with many other securities as of late, the market is quick to pounce on a beaten asset for the rebound.
Meanwhile, in the United States, we see the market edge higher, with the NASDAQ and Dow Jones climbing back to their all-time highs on useful US inflation data. However, the outperformer was the SP500 with cyclical assets such as energy stocks help push the index past its all-time highs.
The S&P 500 broke the 3,386 level, finishing the US trading session just under 3390, an all-time high.
This is a familiar picture with investors and traders who have been following the markets for the past couple of months – the market rallies on good news regardless of the relevancy, with the market discounting the bad news citing Fed liquidity propping up assets. Regardless, the rally in equities has been astounding, proving the wrong unbelievers of the “V-shape” recovery.
Barry Jones, manager at the James Investment research, stated that the rally in the equity markets has been “absolutely amazing” and that the market has “done the V-shape recovery that the economy has not” with the “stock market [plowing] right ahead.”
Futures pulled back slightly at the end of the US session, most likely gearing up for the retail sales figure this Friday. A better than expected result will most likely see the NASDAQ push up above its record high of 11,286 and solidifying the S&P 500’s push above its all-time high.
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.
There have been talks for a Trans-Tasman bubble since the Coronavirus lockdowns in March. However, different approaches from New Zealand and Australia have made this reality more a far fetched dream.
Although both countries would benefit from the trans-Tasman bubble, New Zealand would arguably benefit greater due to 5.8% of GDP being attributable to Tourism. Over 180,000 individuals are employed due to tourism and make up about 7.5% of the workforce in New Zealand.
However, as much as a trans-Tasman bubble is encouraged, the difference in approaches has made it challenging to implement. With New Zealand digging their heels and imposing one of the strictest lockdowns in the world, while Australia gave their citizens relative freedom, only imposing social distancing guidelines. The contrasting methods have become evident – with Australia still making records in daily Coronavirus cases, while New Zealand consistently records single-digit case numbers. Victoria, Australia, reported 428 new Coronavirus cases on Friday, making it the state's largest daily increase since the pandemic.
This is on the back of the Prime Ministers' Scott Morison and Jacinda ADern opening up travel between the two countries. Scott Morison stated that "she [Jacinda Adern] raised the very issue [the bubble] with me, and we're progressing those discussions." However, he also stated that it is "going to be a little be moderated for what's happening in Victoria," insinuating a possible exclusion for citizens that live in Victoria. Melbourne, a major city in Victoria, recently hit 5000 Coronavirus cases as the city re-enters a second lockdown.
The AUD/NZD depreciated to parity in the middle of March as risk currencies dived – with the NZD showing some strength due to New Zealand's efficient suppression of the Coronavirus. However, the Australia dollar has since rebounded, trading at the 1.067 level. There may be an argument for the Australian dollar is slightly overvalued compared to the New Zealand dollar as New Zealand's economy has been restarting without any relative setbacks. However, as demand for commodities such as oil and iron rises across the world of which Australia is a major exporter, demand for the Australian dollar may increase, strengthening relative to the NZD.
However, the significant indices for Australia and New Zealand may show outperformance, rewarding New Zealand in their Coronavirus suppression. Since their March lows, the NZX 50 has outperformed the Australian 200 Index by 4%. If New Zealand continues to outperform with regards to the Coronavirus relative to Australia, we may see a good opportunity to shorten the ASX and go long the NZX.
If both countries took the same approach, I believe there would have been a trans-Tasman bubble sooner. Australian Tourism Industry Council Executive Director Simon Westway stated that "Australia needs to get back on its feet before Trans-Tasman bubble," and that Australia needs to open its domestic borders between states before opening up to New Zealand. Jacinda Adern took a stab at Australia's Coronavirus response, stating on video that "If Australia wants a whole country trans-Tasman bubble, we'll be waiting."
The Financial Markets have a heavy data week ahead. With geopolitical tensions ratcheting up, and concerns turning to how governments will slowly pull back their unprecedented support, we are starting to see how the world reacts to a post-Covid world. Currently, they are 8.92 Million confirmed cases globally, with 467k deaths. Here is your week ahead.
With New Zealand entirely out of lockdown, threats of random Coronavirus cases popping up have increased. Facts have emerged from individuals entering the country with special exemptions and not adhering to the quarantine rules. Currently, the country has 1,161 confirmed cases, with 22 deaths. With the RBNZ implementing asset purchases of $30 Billion, the central bank was ready to take the full brunt of the Coronavirus for the financial markets. With that said, analysts predict the central bank to keep rates as is at 0.25%. Chairman Adrian Orr stated that negative rates are not out of the question; however, it is highly unlikely and will not come till next year. (Also a partial reason as to why negative rates could not be implemented in the first place is due to banks’ computers not being able to handle negative rates)
Similarly, to New Zealand’s Reserve Bank, the ECB has dedicated a sizable chunk to help the European economy recover from the Coronavirus. The Policy meeting hopes to discuss the future of the European economy, future monetary policy stance, and provide guidance on economic developments. This report will be fundamental in determining the mindset of the ECB, and what the future financial environment will be in the European Union.
With Coronavirus cases increasing above their average in many states, the virus remains front in center for many Americans. With election season coming up, President Donald Trump has resorted to opening the states with regard to the rising cases. Peaceful racial protests continue to fuel the spread of the Coronavirus. The previous unemployment claims dropped to 1.52 million last week, showing signs of American citizens going back to work. Analysts predict that figure to drop to 1.508 Million unemployment claims. With the consumer being touted as the backbone of the American economy, hopes are on the consumer to provide that initial boost to the economy. Analysts predict a drop of the Core Price index to 0.9% year over year, down from 1%. Furthermore, analysts predict a -5% Quarter over Quarter growth rate.
Investors and traders need to be careful of sudden policy changes affecting their trades and investments in the week ahead. Here is your market recap over the weekend