NZD/USD: a sharp drop amid a number of factors

 
 
 
 
 
 
 

Information from New Zealand late last night put pressure on the New Zealand dollar. The New Zealand dollar / US dollar pair dropped by 80 points at once, falling below 0.7100, after the government announced a review of housing policy and the abolition of tax breaks for real estate investors.

The National Real Estate Agency (REINZ) now plans to borrow NZ $ 2 billion to buy land, while an additional NZ $ 3.8 billion will be spent on housing and infrastructure development. A number of laws were also passed to facilitate the receipt of grants for the first housing and to exclude the possibility of deducting interest on a loan from real estate tax.

High activity in the housing market helped soften the blow to New Zealand's economy from the Covid-19 pandemic, but at the same time exacerbated the problem of inequality, forcing the government to take action against investors, economists say.

The New Zealand dollar reacted to this news with a sharp drop, while investors, at the same time, doubt that the government will be able to implement the announced measures in full. They also fear that the New Zealand government's plan to curb rising house prices will slow the country's recovery.

At the beginning of today's European session, the NZD continues to weaken, and the NZD / USD pair fell to 0.7025 mark, the low of today's trading day, including against the backdrop of the strengthening of the US dollar.

The massive refusal of the EU countries to use the AstraZeneca vaccine and the extension of quarantine measures in a number of European countries caused a fall in stock indices and commodity prices, in particular oil, as well as the strengthening of the dollar as a defensive asset. Despite statements by the World Health Organization and the EU Medicines Agency regarding the AstraZeneca vaccine, the countries that have refused are in no rush to resume use of this drug, which significantly slows down the already low rates of vaccination.

Yesterday, Fed Chairman Jerome Powell reiterated that the Fed will continue to support the economy "for as long as necessary". In his opinion, the economic recovery is "far from complete", and the trajectory of the economy is still dependent on the coronavirus.

On Tuesday, the US Congress will host the first joint speech by Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen on measures to support the economy in a pandemic.

Powell is likely to reiterate that the country's economic recovery is far from complete, despite the recent improvement in the situation, and the central bank plans to continue to implement support measures.

“Overall, the recovery is progressing faster than expected and appears to be getting stronger”, Powell’s scheduled speech to Congress said Tuesday. “However, the recovery is far from complete, so the Fed will continue to provide the economy with the support it needs for as long as will need".

US central bank executives do not expect rate hikes until at least 2024. The Fed also plans to continue to buy at least $ 120 billion in Treasury bonds and mortgage-backed securities a month until "significant progress" is made in economic recovery, as evidenced by the central bank's announcement following last Wednesday's meeting.

However, US stock index futures are declining and the dollar is strengthening ahead of Fed Chairman Jerome Powell's speech. Investor sentiment is also being affected by an increase in the number of coronavirus cases in Europe and the recent extension of quarantine measures in Germany, France and Italy.

Investors are wondering if Powell will change his stance on the recent rise in yields and whether the Fed will consider slowing down bond purchases to curb inflation. His address to Congress will begin at 1:00 pm (GMT).

Despite the fact that the bond market is stabilizing (the yield on 10-year US Treasury bonds has been declining for the third day in a row and now stands at 1.635% against yesterday's 1.682%), the dollar is strengthening. DXY dollar index futures are traded near 92.17 mark at the time of this article, which is the highs of the last 10 days.

Against the background of the strengthening of the US dollar, it is likely that the decline in the NZD / USD pair may continue up to the support levels 0.7000, 0.6970 (see Technical analysis and trading recommendations).