NZD/USD vulnerable to a bigger set back after strong gains in recent months – MUFG

After recent considerable gains, analysts at MUFG Bank, have become more cautious over the near-term outlook for the New Zealand Dollar (NZD) and risk assets more broadly. They point out NZD performance remains tightly linked to risk sentiment especially against USD.

Key Quotes:

“The NZD has been the best performing G10 currency so far this month. It has strengthened by 2.4% against the USD and 1.1% against the AUD. It helped to lift NZD/USD to a recent high of 0.6584 on 10th June which was close to last year’s average of 0.6591. The initial COVID-19 related sell off from March, when the pair hit a low of 0.5470, has already been fully reversed. 

“The performance of the NZD remains tightly linked to investor risk sentiment especially against the USD where the 30-day rolling correlation between daily percentage changes in the NZD/USD and S&P 500 index remains elevated at +0.65.”

“It keeps pressure on the RBNZ to maintain a dovish policy stance to support the economic recovery and dampen NZD strength. The RBNZ continues to encourage speculation that the further policy could soon be forthcoming.”

“The potential for negative rates and foreign asset purchases pose the main downside risks for the NZD.”

“We continue to see risks tilted to the downside for risks assets and the NZD in the near-term given the accelerating spread of COVID which threatens to dampen optimism over the global economic recovery. The RBNZ’s still dovish policy stance remains a potential source of relative underperformance too compared to the AUD.”