NZD/USD drops under 0.6700 for first time since November 2020

• NZD/USD’s drop continued on Monday with the pair hitting its lowest point since November 2020.
• NZD held up better than its risk-sensitive peers, perhaps amid reluctance to sell it ahead of key Q4 CPI data.

The NZD/USD sell-off that really got kicking last Thursday when the pair breached long-term uptrend support and tumbled below 0.6750 continued on Monday as risk appetite continued to deteriorate. The pair on Monday fell beneath the 0.6700 level for the first time since November 2020 and has stabilised in the 0.6680 region, down about 0.4% on the day, up from its earlier session lows in the 0.6660 area. NZD/USD has for the most part been trading as a function of broader risk appetite and tracking movements in US equity markets, which are substantially lower on the day, though are in fairness also off earlier lows.

Driving the generalised risk-off moves seen in markets on Monday that has hit risk-sensitive currencies (like NZD) particularly hard whilst benefitting safe-haven currencies like USD, JPY and CHF has been renewed focus on Fed tightening as well as geopolitics. The New Zealand dollar, though suffering in the unfavourable market mood, has not been the worst hit amongst the G10, with CAD, GBP, AUD, SEK and NOK all fairing worse. That could be a reflection that, prior to Monday, NZD had already been one of the worst-performing G10 currencies this month and NZD bears were a little tired.

Alternatively, it could be a reflection of reluctance to sell the kiwi ahead of Thursday’s key Q4 2021 Consumer Price Inflation report. This report, which could reveal headline inflation nearing or hitting 6.0% YoY, could pump expectations for RBNZ tightening in a way that might shield NZD from further hawkish Fed-related USD advances. ING commented that “the market’s tightening expectations for the Reserve Bank of New Zealand are already quite aggressive (a 25bp hike in mid-February and at least five more in 2022), but we think that a strong CPI read may fuel speculation that the Bank will go for 50bp in February, which should be translated into a stronger NZD”. The bank does caveat that for NZD/USD to recover, broader risk appetite will need to stabilise.