• Joel

NZDUSD surges to more than two-year highs above 0.7000, here’s why…

NZDUSD surged above the 0.7000 level for the first time since June 2018 this morning, and is currently an outperformer within G10 FX markets alongside fellow its antipodean currency AUD.

A few factors have boosted the kiwi today; firstly, markets are in a fairly upbeat/risk-on mood. Global equities are higher, commodities are higher, bonds are lower and risk-sensitive currencies are outperforming in FX markets at the expense of safe-haven currencies such as USD.

Two key US political uncertainties have been overcome;

1) President-elect Joe Biden picked his Treasury Secretary, opting to go with the market pleasing former Chair of the Federal Reserve herself Janet Yellen. With a wealth of experience at the top level of economic policymaking in the US, markets see Yellen as a “safe pair of hands”. Moreover, markets are also relieved that Biden didn’t go with any of the more left-leaning candidates.

2) The Trump Administration allowed the General Services Administration to inform the incoming Biden Administration that the formal transition process can begin. Though Trump is yet to admit defeat and is still pursuing his countless lawsuits and claiming fraud, this seems to be the first step to him admitting defeat, which gives markets one thing less to worry about.

But some factors down under have also improved sentiment towards the Kiwi;

Hints of coming inflation could be giving the USD bulls might hope that Monday’s data foreshadows a coming rise in inflation that might lead to the Fed raising interest rates sooner than currently expected by most market participants, hence the large positive USD reaction.

Elsewhere, other factors that might be working in USD’s favour are recent reports that the Trump administration is pushing for new hard-line measures against China to prevent them from employing economic coercion.

According to the Senior officials, they want to create an informal alliance of Western nations to jointly retaliate when China uses its trading power to coerce countries and were motivated by the economic pressure that China has been putting on Australia after the country called for an independent investigation into the origins of the Covid-19 pandemic.

This type of approach to tackling China is likely to be popular amongst the Biden administration, who have indicated they favour the US essentially teaming up with other Western democracies (like the EU, UK, Canada, Australia etc.), rather than the US trying to go it alone as it did for most of the Trump administration years. Hence, this new approach set to be taken by the Trump administration is likely to continue under the Biden administration.

Today’s news is unlikely to be a game-changer for US/Chinese relations, or more broadly West/China relations, but is likely to just highlight the continued economic/technological decoupling that is likely to continue under the still fairly anti-China Biden administration over the next four years, or so most analysts in the market assume. Still, USD typically does well from signs of increased global trade tension.


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