NZD/USD turns south after hitting multi-month tops, below 0.7200

• NZD/USD witnessed a modest pullback from multi-month tops touched earlier this Thursday.
• A softer risk tone, elevated bond yields benefitted the safe-haven USD and exerted pressure.
• Rising bets for an additional RBNZ rate hike warrants caution for aggressive bearish traders.

The NZD/USD pair extended its retracement slide from multi-month lows and was last seen hovering near the lower end of the daily trading range, around the 0.7175 region.

Having climbed to the highest level since June 11 earlier this Thursday, the NZD/USD pair witnessed an intraday turnaround from the 0.7220 area amid a modest pickup in the US dollar demand. Fresh worries about a credit crunch in China's real estate sector tempered investors' appetite for perceived riskier assets. This, in turn, assisted the safe-haven USD to stage a modest bounce from over three-week lows and prompted some long-unwinding around the major.

The heavily indebted China Evergrande Group said on Wednesday that a $2.6 billion deal to sell the controlling stake in its property management business failed. The development took its toll on the global risk sentiment, which was evident from a generally weaker tone around the equity markets. Apart from this, the recent runaway rally in the US Treasury bond yields was seen as another factor that acted as a tailwind for the greenback.

The US bond yields have been scaling higher since late September amid prospects for an early policy tightening by the Fed. The FOMC meeting minutes released last Wednesday reaffirmed that the Fed remains on track to begin rolling back its massive pandemic-era stimulus as soon as November. The markets have also been pricing in the possibility of an interest rate hike in 2022 amid worries about a faster than expected rise in inflation.

That said, this week's US macro releases – Industrial Production and housing market data – pointed to weakening economic activity and moderated expectations for a more aggressive policy response by the Fed. This could keep a lid on any meaningful gains for the greenback and lend some support to the NZD/USD pair. This warrants some caution for bearish traders amid rising bets that the RBNZ will hike interest rates further to contain stubbornly high inflation.

Moreover, Thursday's pullback could still be attributed to some profit-taking against the backdrop of the recent strong rally of over 300 pips from the vicinity of the 0.6900 mark touched on October 13. This further makes it prudent to wait for a strong follow-through selling before confirming that the NZD/USD pair has topped out in the near term and positioning for any meaningful corrective slide.

Market participants now look forward to the US economic docket – featuring the releases of the Philly Fed Manufacturing Index and the usual Weekly Initial Jobless Claims. This, along with a scheduled speech by Fed Governor Christopher Waller and the US bond yields, might influence the USD later during the early North American session. Traders will further take cues from the broader market risk sentiment to grab some opportunities around the NZD/USD pair.

Technical levels to watch