The best performing currencies today were the New Zealand, Australian and Canadian dollars. Having fallen to year to date lows last week, commodity currencies snapped back sharply in the last 48 hours. At first the moves were driven by U.S. dollar weakness but the greenback’s steady performance against euro, the Japanese Yen, sterling and Swiss Franc suggests that this is a commodity specific story.
On a short term basis, rising crude prices are playing a significant role in the recovery of the Canadian dollar. In the past 48 hours, we’ve seen a nearly 8% recovery in WTI. The New Zealand dollar on the other hand rebounded on the back of stronger retail sales and the prospect of a better trade balance report this evening.
On a longer term basis, the New Zealand and Canadian economies enjoy strong underlying fundamentals. New Zealand is in lockdown but cases are very low and investors are confident that they will drive COVID-19 out of the country for the second time. NZD/USD plunged when the Reserve Bank of New Zealand surprised the market by leaving rates unchanged but since then policymakers have made it clear that they would have raised rates if there was no lockdown. Today, RBNZ Assistant Governor Hawkesby said policy decisions won’t be tightly linked to COVID-19 as lockdowns only delay spending. She even indicated that the central bank considered a larger 50bp hike.
When it comes to monetary policy, the Reserve Bank of New Zealand and Bank of Canada are among the world’s least dovish central banks. The RBNZ ended asset purchases while the BoC formalized a plan to taper. Both economies are faring better than their peers. The labor market in New Zealand is back to pre-pandemic levels and in Canada, the rapid vaccine rollout over the past few months puts the country at less risk of a dangerous Delta spiral. More Canadians are newly vaccinated than Americans on a per capita basis which should spark a fresh spending recovery. Inflation is on the rise in both countries and with oil prices nudging higher, CAD and NZD are attracting buyers.
Although the Australian dollar participated in the rally, Australia is in a very different position on a monetary, economic and COVID-19 basis. With a very low vaccination rate and record new cases, there’s no immediate end in sight for lockdowns. Prime Minister Morrison hopes restrictions could ease with a vaccination target of 70% but with only 30% of the eligible population fully vaccinated, there’s a long road ahead. The country is at risk of double-dip recession leaving the Reserve Bank of Australia with no choice but keep monetary policy easy. Yet AUD is rallying because it is a deeply oversold high beta currency. This means that when stocks rally, there tends to be demand for the currency.
Euro is vulnerable to renewed losses with Germany’s IFO report scheduled for release. Earlier this week, we saw declines in Germany’s PMI indices and at the beginning of the month, the ZEW survey showed a sharply decline in sentiment. According to both reports, Germany’s economy is recovering but investors and businesses are worried about a fourth COVID-19 wave.
Managing Director of FX Strategy BK Asset Management