NZD/USD probing annual lows just above 0.6800, remains vulnerable to unwind of hawkish RBNZ bets

• NZD/USD continues to trade heavily on Monday and is probing annual lows and support just above 0.6800.
• The pair remains vulnerable to an unwind of hawkish RBNZ bets.

Earlier attempts at recovery following last week’s intense selling pressure have faded, with NZD/USD dropping back towards 0.6800 having topped out just under 0.6840 earlier in Friday’s European morning. The pair, which is now down about 0.2% on the day, is probing last week’s annual lows around 0.6805 as the pair threatens a more convincing break below the 0.6800 level. A break below this level could usher in an acceleration of (technical) selling that could propel the pair lower towards the next area of significant support under 0.6600.

To recap recent price action; NZD/USD dropped more than 2.5% last week, its worst week since August when a snap lockdown caused the RBNZ to delay its first post-Covid-19 rate hike. The downside was initially triggered by a broad strengthening of the US dollar as momentum built behind the idea that, amid high inflation and a continued strong recovery, the Fed would quicken its QE taper and bring forward rate hikes. NZD was then a victim of its status as a risk/commodity-sensitive currency, as well as its exposure to hawkish central bank bets (given the RBNZ’s stance as one of the most hawkish G10 central banks) when markets tumbled on Friday. News about the Omicron Covid-19 variants high degree of mutations (vaccine resistant?) and high transmissibility triggered risk-off and a paring back on hawkish central bank bets, a negative combination of the kiwi.

This Monday, despite the broader market mood having improved a tad on hopeful early signs out of South Africa that the illness caused by Omicron infection is milder than with other strains of the virus, NZD continues to struggle. That could be due to dovish commentary from RBNZ Chief Economist Yuong Ha, who said that the bank might pause its rate hike plans should Omicron be a “game-changer”. As fears linger about the severity of the new variant, this is likely to weigh disproportionately on the kiwi, given its disproportionate exposure to an unwind in hawkish central bank bets (the build-up of which previously support the kiwi).