The Australian and New Zealand Dollars are trading mixed on Wednesday with the Kiwi posting a modest gain and the Aussie clawing back earlier losses. The New Zealand Dollar is rebounding after touching its lowest level since November 19 the previous session. Meanwhile, the Australian Dollar is trying to bounce back after hitting its lowest price since November 24 earlier in the session.
Fundamentally, the inexorable spread of the Delta variant has shut more of the Australian economy while undermining risk sentiment globally. Technically, traders are saying a break through long-term support levels encouraged shorting by black box and algorithmic funds that follow trends.
Technical factors also drove the New Zealand Dollar into a multi-month low on Tuesday, offsetting the recent bullishness fueled by investor bets for an earlier-than-expected rate hike by the Reserve Bank of New Zealand (RBNZ).
Richard Franulovich, Westpac’s head of FX strategy summed up the price action this way, “Near term, the rising third wave of global case COVID cases/heightened fear of the delta variant and the increasingly severe lockdowns across Australia, all point to the risks of an extension down towards .7200/25 over the next few weeks.”
New Lockdowns Already Impacting Australia’s Economy
The dire impact of lockdowns was underlined on Wednesday by data showing retail sales slumped 1.8% in June, three times the decline expected by traders.
Reuters said an even worse result was expected this month given more than half the population were now shut in, fueling speculation the Reserve Bank of Australia (RBA) would have to reconsider its plan to taper bond purchases from September.
Traders Adjust Chances of RBNZ August Rate Hike
The main reason for the weakness in the New Zealand Dollar is traders making adjustments to the chances of a rate hike by the RBNZ in August. According to overnight index swaps, the spread of the Delta variant globally had seen the market pare back the chance of an August hike from the RBNZ to 62%, from around 90% last week.
“NZD is highly sensitive to changes in the global growth outlook,” noted analysts at CBA.
“The risk is the downward reassessment of the global recovery continues to shift market expectations for RBNZ rate hikes, pushing NZD/USD below our forecasts.”
Technical factors helped take the AUD/USD and NZD/USD to multi-month lows, and technical factors could help trigger a near-term short-covering rally due to extremely oversold conditions. However, this is only a guess, not a sure thing since bearish fundamentals are behind the selling pressure.
Without a support base in place in either the Aussie or Kiwi, we can’t call a bottom yet. Furthermore, until the fears of the COVID breakout subside, traders are likely to be in the “sell the rally mode.”