The improvement of the epidemiological situation in New Zealand, hopes for the RBNZ’s rate hike, and the high global appetite for risk make NZDUSD bulls feel confident. Let us discuss the Forex outlook and make up a trading plan.
Monthly New Zealand dollar fundamental forecast
The market has different attitudes towards the mistakes of central banks. As I expected, investors’ hatred of the New Zealand dollar over the Reserve Bank’s fear of nationwide isolation did not last long. Kiwi remains a traders’ favorite. Over the past six months, it has strengthened against the USD by 2.3% and serves as the best G10 performer in this period.
The main drivers of NZDUSD growth include improved global risk appetite, hopes for Chinese stimulus, and expectations of continued monetary policy normalization by RBNZ. Adrian Orr and his colleagues were the first among the G10 central banks to taper QE in July and were ready to raise the cash rate in August if not for COVID-19. Then the NZD collapsed due to the reluctance of the RBNZ to do what investors expected of it. But then the Kiwi quickly regained lost ground. Currently, the money markets predict an increase in the main interest rate by 100 bps until the end of 2022.
Dynamics of market expectations for cash rate
Source: Bloomberg.
The yield on New Zealand bonds will grow along with the cash rate. Local 10-year bond rates are above 2% and are at their highest level since April 2019. They are higher than their counterparts from the 24 largest economies tracked by Bloomberg. It is not surprising that the Kiwi is rapidly strengthening against the background of the growth of the US and world stock indices. The wide yield differential and high reliability of New Zealand bonds create excellent opportunities for carry traders.
Dynamics of bond yields
Source: Bloomberg.
The Kiwi is supported by the decision of Jacinda Ardern’s government to lift the national lockdown all over the country, except Auckland. As a result, there are growing risks of divergence in economic growth with neighboring Australia, whose GDP risks turn negative in the third quarter.
Good news from China is worth noting. China’s exports grew by 25.6% to $294.3 billion in August, and imports by 33.1% to $236 billion. Both indicators are record-breaking in absolute terms. A trade surplus of $58.3 billion and expectations of reducing contributions to the legal reserve make the GDP acceleration very possible. According to Bloomberg experts, the PBC is ready to pour about 1 trillion yuan into the system.
The effective pandemic suppression policy inspires hope for a bright future in China amid widespread uncertainty over the further Delta spread. This strengthens its proxy currencies, such as the Australian and New Zealand dollars.
Monthly NZDUSD, NZDJPY, EURZND and AUDNZD trading plan
RBNZ’s monetary restriction, high global risk appetite and support from China made it possible to implement the EURNZD and AUDNZD selling strategies outlined in the previous article. The NZDUSD has exceeded the upper border of the expected consolidation range by 0.71. Only the S&P 500 correction will prevent the pair from continuing the rally. Hold EURZND and AUDNZD shorts and use NZDUSD and NZDJPY corrections to enter long trades in the direction of 0.721 and 79.5.
Price chart of NZDUSD in real time mode
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