The Kiwi dollar is one of the best performers in the G10 today after rating agency Fitch revised the outlook of its AA sovereign rating to positive from stable. This was enough to send NZD/USD above 0.88, although it has since given back some gains.
Fitch justified its move by saying that New Zealand’s fiscal consolidation efforts have strengthened the “resilience of New Zealand’s credit profile”. Although Fitch mentioned that New Zealand still has some vulnerabilities, including being too reliant on commodities and China as an export destination, this is still a vote of confidence in the economy.
The RBNZ has also been hiking interest rates, which is a powerful deriver of currencies in this low yield environment. If volatility can remain low then NZD could benefit from a return of the carry trade, with investors preferring to own higher yielding currencies like the NZD.
The Technical View:
The macro outlook for the Kiwi may be positive right now, but at FOREX.com we always like to look at the technical picture to get a full view of what is going on. NZDUSD is in a technical uptrend – it is making higher highs and higher lows, however it has been getting stuck around 0.8780 (where it is trading at the time of writing).
This is the second time it has hovered around this level; the first time was in early May, after failing to break above here NZDUSD fell back to 0.8400. Thus, a daily close above 0.8780 would be a bullish development in the short term that could open the way to our first level of resistance at 0.8840-45.
0.8843 is the July 2011 high and critical resistance. Above here opens the way back to 1981 highs, so we would expect some hesitation around this level. If we can clear this multi-decade high then we may see further upside, to 0.90 and beyond.
The Yield Picture:
Perhaps the weakest link for the Kiwi right now is the yield effect. Although the RBNZ has been hiking rates, the spread between 2-year New Zealand government bond yields and 2-year US government bond yields has narrowed significantly in the past few weeks. This spread has now diverged from NZDUSD, which is worth flagging for two reasons:
- The yield spread and NZDUSD tracked each other closely between March and June.
- Although the spread and NZDUSD has diverged in the past, for the last year, the spread has always over-shot to the upside, with the currency playing catch up. Now that the spread is narrowing, has the Kiwi gone too far too fast?
The market seems to be pricing in an end to the RBNZ’s rate hiking cycle, and a more hawkish FOMC. If this happens then it could hurt NZDUSD. However, we think the RBNZ may hike rates later this month and the FOMC could keep rates lower than one would expect even though the economic data is starting to turn. If this turns out to be true then we could see the spread turnaround, which may boost NZDUSD.
Conclusions:
- The macro and technical pictures are both supportive of further strength for the kiwi.
- However, we need to clear 0.8845 – the 2011 high, before another advance looks credible.
- While Tuesday’s credit rating upgrade was a positive development, the yield effect is the weakest link for the Kiwi right now.
- The spread between 2 year NZ and US rates has diverged from NZDUSD, which means that we are going to wait and see if this pair can clear 0.8845 before we get too excited about another leg higher.
Source: FOREX.com
Source: FOREX.com and Bloomberg
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