NZD/USD climbs to fresh session tops, 0.7200 back in sight

• NZD/USD caught some fresh bids on Friday and reversed a major part of the overnight slide.
• Stability in the markets benefitted the perceived riskier kiwi amid a subdued USD demand.
• Elevated US bond yields helped limit the USD losses and might cap the upside for the major.

The NZD/USD pair edged higher through the early part of the European session and refreshed daily tops, around the 0.7180-85 region in the last hour.

The pair managed to regain positive traction on the last day of the week and has now reversed a major part of the overnight retracement slide from the highest level since June. Reports that China Evergrande made funds available for a bond coupon to a trustee account helped ease concerns about a credit crunch in China's real estate sector. This, in turn, undermined the safe-haven US dollar and acted as a tailwind for the perceived riskier kiwi.

Meanwhile, the downside for the USD remains cushioned, at least for the time being, amid elevated US Treasury bond yields.  It is worth recalling that the yield on the benchmark 10-year US government bond rose to the highest level since May 13, around 1.683% on Thursday amid expectations for an early policy tightening by the Fed. Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation.

The speculations were reinforced by comments from Fed Governor Christopher Waller, saying that the US central bank may have to act faster if inflation remains too high. Adding to this, Atlanta Fed President Raphael Bostic said that he has pencilled in a rate increase in the late third, maybe early fourth quarter of 2022. That said, rising bets for an additional interest rate hike by RBNZ remained supportive of the bid tone surrounding the NZD/USD pair.

Market participants now look forward to the US economic docket, highlighting the release of the flash Manufacturing and Services PMI prints later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the NZD/USD pair. Traders will further take cues from the broader market risk sentiment for some short-term opportunities around the major.

Technical levels to watch