NZD/USD eyes test of 0.7200 level as US dollar fades

  • NZD/USD advanced on Thursday as the USD fell, but was unable to reclaim 0.7200.
  • The pair is in the middle of its range over the last two weeks.

NZD/USD spent the majority of Thursday trade on the front foot amid a recovery in the market’s broad appetite for risk following Wednesday’s risk asset sell-off. Having fallen nearly as low as the 0.7100 level prior to the start of the US session, the pair has since recovered back towards the 0.7200 mark, and currently trades in the 0.7180s, up 0.4% or around 30 pips on the day. Trading just below the 0.7200 mark put NZD/USD right in at the centre of the pair’s range over the last two weeks; 0.7250 has acted as a ceiling to the price action and 0.7100 as a floor.

Driving the day

Risk appetite has taken a meaningful turn for the better on Thursday, with US equities erasing about half of the losses incurred on Wednesday in the lead up to the FOMC monetary policy decision event. Not that Wednesday’s downside move was spurred by the Fed, whose ultra-dovish tone ought actually be interpreted as a risk appetite positive. Rather, Wednesday’s risk-off was a result of a combination of overvaluation fears and short-selling hedge funds being forced to liquidate profitable large-cap stock long positions as speculative retail trader driven mania continued in the likes of GameStop.

The fact that retail brokers have taken action to restrict the ability of retail traders to continue pumping these stocks, thus easing the pressure on hedge funds (and the broader market), likely helped sentiment take a turn for the better and helped the likes of NZD. US stocks are up, bond yields are up and safe-haven currencies (USD, JPY and CHF) are generally underperforming.

Market analysts note that another factor driving equity upside on Thursday, and thus hurting demand for the likes of safe-haven JPY, is dip-buying. Looking past all of the retail trader driven speculative mania that has taken place (and dominated the headlines) over the past few days, the major fundamental factors that have supported the record-breaking rally in US stocks from March 2020 lows to current near all-time high levels remain largely unchanged; 1) real yields on US and international debt markets remain at historic lows as a result of ultra-accommodative monetary policy at most major global central banks, meaning TINA remains in place (an acronym meaning There Is No Alternative to investing in equities if you want to get a decent yield) and 2) though facing hiccups, mass vaccination programmes are underway in major developed economies, meaning an aggressive post-pandemic global economic recovery is still very much expected to begin within the next few months.

Credit: FX Street

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