NZD/USD’s sharp reversal continues but pair finds support at 0.7250

• NZD/USD has sold off more than 200 pips from Thursday’s highs above 0.7450.
• But the pair is finding support in the 0.7250 area amid some technical confluences.
• ING thinks NZD will outperform AUD going forward given a less dovish RBNZ.

Friday is seeing another sharp drop in NZD/USD. At present, the currency trades around 1.6% or nearly 120 pips lower on the day and has slumped all the way from Asia Pacific highs in the 0.7370s to current levels around the 0.7250 mark. That means the pair has reversed more than 200 pips from Thursday's early European session highs of above the 0.7450 mark.

0.7250 is a key area of support for NZD/USD, hence why it seems to be finding some support here for the moment; the area corresponds with the late January to early/mid-February highs and also the pair’s 21-day moving average or DMA (which currently resides at 0.72408. A breakthrough this region will open the door to a test of the 0.7200 level, which coincides pretty much bang on with the pair’s 50DMA, as well as an uptrend linking the 21 December 2020, 28 January and 17 February lows.

Driving the day

Fridays drop comes amid a US dollar that is bid against most of its G10 peers, possibly as a result of month end flows, and is especially bid versus the antipodes. While NZD/USD is down about 1.6% on the day, AUD/USD’s losses are closer to 2.0%. New Zealand trade numbers, released at the start of Thursday’s Asia Pacific session, were broadly ignored, but dovish remarks from the Governor of the RBNZ, who reiterated that more monetary stimulus might be needed might be contributing to NZD’s decline; given recent changes to the RBNZ’s remit, however, most analysts see such rhetoric as more bark than bite, given the bank will struggle to ease policy any further without creating further unwanted upwards pressure on housing prices (see below).  

NZD to outperform AUD going forward, says ING

Following the New Zealand government’s decision to amend the Reserve Bank of New Zealand’s remit to take into account house prices when setting monetary policy sets the stage for NZD outperformance versus the Aussie dollar on the back of central bank divergence.

One of the New Zealand government’s key policy aims has been to make housing much more affordable, an aim that has been crushed by the RBNZ’s response to the Covid-19 pandemic; the RBNZ axed rates to 0.25% and started an NZD 60B QE programme and the low rate environment the YoY rate of median house price growth to 3.5%, its highest level in more than a decade.

The RBNZ has recently opted to tighten loan-to-value ratio (LVR) restrictions on mortgage lending in an effort to dampen housing demand. Note that such a policy makes it harder to lower-income New Zealand citizens to get on the housing ladder as they must now save up a significantly greater amount to afford the house deposit, in a way flying in the face of the government’s aim to make housing more accessible to all.

Despite tougher LVR restrictions, the change to the central bank’s remit effectively rules out negative rates, thinks ING, before caveating that negative rates were already unlikely to be implemented given the New Zealand economy’s relative strength (compared to other developed market peers, anyway) and the fact that the country has kept the pandemic broadly contained.

Moreover, ING thinks that the new remit will create pressure on the RBNZ to start hiking interest rates before other developed market central banks, given that the combination of ultra-low interest rates plus the expected strong economic rebound in the coming months is likely to generate further upside in house prices. 25bps of tightening is now priced in for 2022 and ING “suspect that speculation for an even earlier or a more substantial policy normalisation cycle will continue mounting for the rest of the year.”

“From an FX perspective” concludes the bank, “higher chances of a tightening in New Zealand before other major economies bodes well for NZD prospects...  (and) we continue to expect the monetary policy divergence between New Zealand and Australia to remain wide and favour NZD over AUD.”