Daily Market Update

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Sep 24, 2021 | Currency Market Analysis

Global Themes

Daily Market Update - 24th September 2021

Stubborn Kiwi shrugs off headwinds

  • Evergrande, Fed taper fade to black
  • RBNZ tightens LVR restrictions
  • Local trade balance, Fed chair eyed

Evergrande, Fed taper fade to black

To borrow from a few Metallica tracks, earlier this week nothing else mattered except for a potential Evergrande default and the looming risk of a Fed taper. Yet as so happens in markets the expectation of an event can be worse than the reality, and the fear trade faded to black. There is no doubting Chinese property giant Evergande is in trouble, but the vibe seems to smell of a state restructure, whereby there may be a few shareholder haircuts along the way, but debt obligations will be properly met within the allowable 30 day window. The injection of significant liquidity from the People's Bank of China also helped the cause.

On the Fed front the announcement of a gradual taper yesterday morning should have spooked markets but the story has been such a long time coming that it didn’t shift the needle in FX markets much at all. In fact the US Dollar is now on the backfoot, and if the age old adage that if something can not rally on good news then maybe it can’t rally at all is true, then we may be in line for more near term gains in the NZD/USD as we head into Summer.

RBNZ tightens LVR restrictions

In local news the Reserve Bank confirmed yesterday that it will tighten lending for housing yesterday. From November 1 they will be restricting the amount of lending any banks can do above a loan to value ratio (LVR) of 80% to be just 10% of all new loans to owner-occupiers. That figure is down from a current 20%. Granted that initial tightening was supposed to occur on October 1 but has been delayed a month due to the disruption caused by current COVID restrictions.

Earlier in the week comments from Assistant Governor Christian Hawkesby suggested the general path of central banks was a careful, considered one. Coupled together with the housing measures that has led to many market observers predicting just a 25 basis point hike when the RBNZ next meet on October 6, dispelling earlier Bloomberg rumours that a 50 basis point hike might be in the wings. Overnight swap markets now see an 80% of a rate hike at that next meeting, but perhaps the bigger moves will come a year out when around three rate hikes are currently priced in. If the RBNZ do hike come October we think we may see some further moves north there and that can help support the NZD next month. For now, NZD/AUD has rolled off its highs with that re-rating of rate hike expectations.

Local trade balance, Fed chair eyed

After a blockbuster Thursday it is a fairly quiet end to the week today. Local trade balance numbers are due at 10:45am today, while a speech from Fed chair Jerome Powell dominates tonight’s session.

The key takeaway from this week is central banks are shifting to a tightening bias, and while The Fed has clearly signalled it is now in this camp it does appear the RBNZ continues to lead the queue amongst the majors. That can lead to a frontloading in Kiwi moves, provided volatility stays low, COVID fears abate and the RBNZ do in fact hike at their next meeting. We will have more on all that next week – for now enjoy your weekend.

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