NZD/USD consolidates at annual highs above 0.7200 as final trading day of the year approaches

NZD/USD moved above the 0.7200 mark for the first time since April 2018 on Wednesday amid a break weakening of the US dollar that saw the Dollar Index (DXY) drop to fresh annual lows in the 89.50s. The pair closed Wednesday FX trade with gains of around 0.7% or 50 pips and NZD was one of the better G10 FX performers on the day.

Kiwi traders have been primarily focused on global risk appetite and US dollar dynamics over the past few days amid a lack of any notable fundamental’s catalysts coming from down under. Heading into the final trading day of the year, this is unlikely to change and price action remains subject to the usual distortions from month, quarter and year-end portfolio rebalancing flows. These flows seemed to weighed on the US dollar to the benefit of the likes of AUD, NZD and GBP on Wednesday, as traders front-run what is expected to be a pretty grim year for USD.

The year that was for the kiwi…

2020 was a tumultuous year for the New Zealand Dollar, which at the peak of the Covid-19 panic back in March dropped to yearly lows under the 0.5500 level (down nearly 19% from where it started the year in the 0.6700s), only to abruptly reverse to current levels in the 0.7200s by the end of the year. That’s a more than 30% rally from the March lows. Much of this rally owes to a spectacular (if you are a USD bear) effort by the Fed to flood the market with USD liquidity at the height of the USD funding squeeze in March.

On the year, the pair is up just over 7.5%, but the bulk of these year-to-date gains came in the final quarter; since the start of October, NZD/USD is up more than 8.5%. Joe Biden’s US Presidential election victory was one major factor driving these gains (and a weaker dollar) as, under the incoming Biden administration, global growth expectations in 2021 and beyond have received a boost amid hope that the US will pursue less protectionist that will improve global trade conditions. The announcement of effective and subsequent rollout of Covid-19 vaccines further boosted global growth expectations for 2021 and beyond.  

NZD/USD solid Q4 gains compare to less impressive gains in AUD/USD of around 7.0%, in GBP/USD of around 5.2% and in CAD/USD of around 4.2%. New Zealand’s best in the world efforts to contain and almost entirely prevent the spread of Covid-19 within its country is one factor that has likely continued to support NZD throughout the year, while markets pricing out negative RBNZ interest rates and pressure from the government on the bank to pay closer attention to rapidly rising home prices are also likely to have helped.

The coming year…

With pressure from the government not to pump house prices any higher, as well as the fact that the economy has managed to recovery better than originally expected, dovish surprises (like negative rates) seem quite unlikely. Thus, focus is set to remain on the global themes that have dominated in 2021… how does the vaccine roll-out go and how quickly can the global economy start to recovery again from H2 2021? What kind of foreign policy does the Biden administration pursue and, most importantly, how do US/China relations shift? These questions will be key for kiwi traders.

NZD/USD enters new range

With NZD/USD having conquered the 0.7200 level for the first time in nearly two years, a new trading range has been opened up for the kiwi. Q1 2018 lows between 0.7150 and 0.7200 form the bottom of this range, while Q1 and Q2 highs around 07400 form the top.

NZD/USD weekly chart