The New Zealand Dollar (NZD) is on fire lately. Despite the efforts of the central bank to move away from a stronger currency in recessionary times.
The latest employment data out of New Zealand confirms a potential economic recovery. The island nation managed to handle the coronavirus outbreak in an exemplary manner, gaining the world’s admiration in the process.
Emerging vs Developed Currencies
We should make a distinction between developed markets currencies and emerging market ones. Emerging markets’ currencies are under severe pressure lately as the debt piles up faster than in developed countries.
As most of the debt is denominated in USD, 2021 is a challenging year to serve that debt. Only through the end of 2020, around $3.7 trillion of emerging-market debt will come due. Hence, investors prepare in advance and exit emerging currencies.
Why is the NZD an attractive currency?
First, location. Neighboring Australia and close to a region that better handled the pandemic, the NZD is an obvious choice.
Second, the way it handled the crisis so far is exceptional. Fewer cases, more control, economic growth can resume.
Third, the employment data this week shows the economy coming back strongly. The unemployment rate fell to 4% and looks poised to improve more. Also, Inflation is stable or non-existent.
However, the NZD rose most against the USD. The AUD, for instance, outperformed due to the bigger exposure to Asian economies and a strong commodities background. After all, gold exceeded the $2,000 level this week, and the commodity prices followed through. As a commodity exporter, the Australian economy stands to gain the most.
Coming back to the NZD, the flagship pair, the NZDUSD, follows the U.S. equity markets closely. Considering that we are in full summer trading mode, the likelihood is that the direct correlation will continue.
However, keep an eye on this week’s U.S. data. A positive jobs report on Friday should be equities positive, but USD positive too. Will the NZDUSD and other USD pairs break the correlation?
Until Friday, that is unlikely to happen. Trading algorithms closely push the prices higher until the point that it makes no sense anymore. This is not the first time it happens and has nothing to do with the pandemic price action. Instead, this is typical August price action when risk-on dominates the market.