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Currency Market Analysis

Nov 27, 2020 | Currency Market Analysis

Global Themes

November reign

• Kiwi set for stellar monthly gain
• Fed minutes hint at more stimulus
• Trade balance hits 28 year high

Kiwi set for stellar monthly gain

It’s been quite a November for the New Zealand Dollar. With the US election risk removed and the announcement of several vaccine rollouts markets have looked with optimism to 2021. There’s also a record amount of fiscal and monetary stimulus pump priming markets. NZD/USD is up almost 6% for this month alone.

The potential for housing inflation to be added to the RBNZ’s mandate has also scaled back expectations of rate cuts into the negative in 2021. That’s released yet another handbrake on the New Zealand Dollar. As we demonstrated on Tuesday however our extension from trend modelling suggests the Kiwi has powered into overstretched territory so we would be reluctant to bid the bird much higher from here, particularly given we sit at 29 month highs.

Fed minutes hint at more stimulus

Thanksgiving Day ensured a pretty quiet night in markets overnight, but Fed minutes yesterday set up a fairly critical meeting announcement in the early hours of 17th December (NZ time). The general drift was that asset purchases would continue “over coming months” although the Committee had discussed the potential for “more accommodation”. Yesterday we noted the impact that Fed asset purchases were having in the bond market, suppressing the 10 year Treasury yield by up to 1% according to some modelling.

That's important as dampened yields are reducing the appeal of the US Dollar. Significantly however we noted this comment in the minutes - that “a few participants expressed concern that maintaining the current pace of agency MBS purchases could contribute to potential valuation pressures in housing markets”. Sound familiar? The distorted impact of the extraordinary imposition of monetary stimulus is a developing story. We think we will hear a lot more about this in 2021. For now any consideration given by the Fed to housing inflation could remove the need for further stimulus, and boost the USD in the same way that similar talk of a mandate change for the RBNZ boosted the NZD here.

Trade balance hits 28 year high

Finally a quick note on our local trade balance data here yesterday which hit a 28 year high surplus in October. That’s a positive for the currency, although given it was largely driven by a COVID induced 10% drop in imports in the 12 months to October, it might not paint the best picture for domestic consumption. Exports however remained resilient, up 1.2% over the same period.

Black Friday sales dominate today. On the data front there is only second tier numbers from Europe due. Brexit negotiations have stalled, taking NZD/GBP dangerously close to 14 month highs. We remain optimistic on a deal but true to form British and European lawmakers might keep us waiting a bit longer. NZD/AUD also remains near its best levels since April, as we await both the RBA and Australian GDP in a busy start to December next week.

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