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NZD / USD strong reversal continues, but the pair finds support at 0.7250

  • The NZD / USD has sold more than 200 pips from Thursday’s highs above 0.7450.
  • But the pair is finding support at the 0.7250 zone amid some technical confluences.
  • ING believes that the NZD will outperform the AUD in the future given a less moderate RBNZ.

Friday is seeing another sharp drop in NZD / USD. Currently, the currency is trading around 1.6% or nearly 120 pips lower on the day and has plunged from Asia Pacific highs at 0.7370 to current levels around 0.7250. That means the pair has reversed more than 200 pips from Thursday’s European session highs above 0.7450.

0.7250 is a key area of ​​support for NZD / USD, so it seems to be finding some support here for now; the area corresponds to the highs from late January to early / mid-February and also the pair’s 21-day moving average or DMA (currently at 0.72408. A breakthrough in this region will open the door to a test of the level of 0.7200, which practically hits the pair’s 50 DMA, as well as an uptrend that joins the lows of December 21, 2020, January 28, and February 17.

Performance of the day

Friday’s slide comes amid a US dollar that is bidding against most of its G10 peers, possibly as a result of month-end flows, and is especially bidding against the antipodes. While the NZD / USD is down 1.6% on the day, the AUD / USD losses are closer to 2.0%. New Zealand trade figures, released at the beginning of the Asia Pacific session on Thursday, were largely ignored, but dovish comments from the RBNZ governor, who reiterated that further monetary stimulus may be necessary could be contributing to the NZD’s decline. ; However, given the recent changes to the RBNZ’s mandate, most analysts see that rhetoric as more of a bark than a bite, as the bank will have a difficult time loosening the policy further without creating unwanted upward pressure on house prices (see below).

NZD will outperform AUD in future, says ING

Following the New Zealand government’s decision to modify the Reserve Bank of New Zealand’s mandate to take house prices into account when setting monetary policy, the stage is set for an outperformance of the NZD against the Australian dollar due to the divergence of the central bank.

One of the key policy goals of the New Zealand government has been to make housing much more affordable, a goal that has been crushed by the RBNZ’s response to the Covid-19 pandemic; The RBNZ cut rates to 0.25% and started a NZ $ 60 billion QE program and the low-rate environment raised the annual median house price rate to 3.5%, its highest level in more than a decade .

The RBNZ has recently chosen to tighten loan-to-value (LVR) restrictions on home loans in an effort to curb demand for homes. It should be noted that this policy makes it more difficult for low-income New Zealanders to climb the housing ladder, as they now have to save significantly more to pay the house deposit, in a way that goes against the government’s goal of making housing more accessible for all.

Despite tighter LVR restrictions, the change in the central bank’s mandate effectively rules out negative rates, ING thinks, before warning that negative rates were already unlikely to be implemented given the relative strength of the New Zealand economy. (compared to other developed market pairs, anyway) and the fact that the country has kept the pandemic largely contained.

Furthermore, ING believes that the new mandate will create pressure on the RBNZ to start raising interest rates earlier than other developed market central banks, given that the combination of ultra-low interest rates plus the expected strong economic rebound in the next few months generate more rise in housing prices. 25 basis points of adjustment are now priced by 2022 and ING “suspects that speculation for an even earlier or more substantial policy normalization cycle will continue to increase for the rest of the year.”

“From a foreign exchange perspective,” the bank concludes, “greater chances of adjustment in New Zealand before other major economies bode well for the NZD outlook … (and) we continue to expect that the monetary policy divergence between New Zealand and Australia remain broad and favor the NZD over the AUD. “

Technical Levels

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