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Kiwi Extends Drop On Turbulent Day, One-Month Risk Reversal Tanks

NZD

The kiwi capitulated in a risk-off environment and amid holiday-thinned liquidity on Monday. Strong USD outperformance and relatively fragile NZD sentiment sent NZD/USD to its lowest point since the outbreak of the COVID-19 pandemic in Mar 2020.

  • Cross-asset signals were negative for the currency, with the aggregate BBG Commodity Index down 1.6% and with the equity space seeing a sea of red.
  • NZD/USD implied vols were sharply higher, with both 1-month & 1-year tenors hitting four-month highs. One-month option skews sank to worst levels since mid-Jun, suggesting notable increase in bearish sentiment.
  • NZD/USD trades +4 pips at $0.5641 as local financial markets re-open after a holiday. Below Mar 23, 2020 low of $0.5591 would bring Mar 19, 2020 low of $0.5470 into view. Bulls look for a rebound above the $0.6000 mark.
  • The NZD was the second-worst G10 performer on Monday (after the NOK) and remains the second-worst performer this month (after the GBP), losing ~7.3% vs. the greenback only in September.
  • RBNZ Gov Orr blamed the recent kiwi depreciation on a global "capital drain" into the U.S. which acts as a safe haven in uncertain times and where interest rates are being aggressively pushed higher. FinMin Robertson struck similar notes, flagging benefits to exporters despite being cognisant of increased costs of imports.
  • Orr added that the Reserve Bank "still have some work to do" in its efforts to contain inflation, but "the tightening cycle is very mature, it's well advanced." Terminal rate pricing and market expectations for the next MPC meeting are broadly unchanged after Orr's comments, with the Committee expected to raise the OCR by 50bp on Oct 5.
  • Domestic focus turns to ANZBO (Thursday), as well as ANZ-Roy Morgan Consumer Confidence, building permits & another round of comments from RBNZ Gov Orr (Friday).

Fig. 1: NZD/USD vs. NZD/USD1-Month Risk Reversal

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The kiwi capitulated in a risk-off environment and amid holiday-thinned liquidity on Monday. Strong USD outperformance and relatively fragile NZD sentiment sent NZD/USD to its lowest point since the outbreak of the COVID-19 pandemic in Mar 2020.

  • Cross-asset signals were negative for the currency, with the aggregate BBG Commodity Index down 1.6% and with the equity space seeing a sea of red.
  • NZD/USD implied vols were sharply higher, with both 1-month & 1-year tenors hitting four-month highs. One-month option skews sank to worst levels since mid-Jun, suggesting notable increase in bearish sentiment.
  • NZD/USD trades +4 pips at $0.5641 as local financial markets re-open after a holiday. Below Mar 23, 2020 low of $0.5591 would bring Mar 19, 2020 low of $0.5470 into view. Bulls look for a rebound above the $0.6000 mark.
  • The NZD was the second-worst G10 performer on Monday (after the NOK) and remains the second-worst performer this month (after the GBP), losing ~7.3% vs. the greenback only in September.
  • RBNZ Gov Orr blamed the recent kiwi depreciation on a global "capital drain" into the U.S. which acts as a safe haven in uncertain times and where interest rates are being aggressively pushed higher. FinMin Robertson struck similar notes, flagging benefits to exporters despite being cognisant of increased costs of imports.
  • Orr added that the Reserve Bank "still have some work to do" in its efforts to contain inflation, but "the tightening cycle is very mature, it's well advanced." Terminal rate pricing and market expectations for the next MPC meeting are broadly unchanged after Orr's comments, with the Committee expected to raise the OCR by 50bp on Oct 5.
  • Domestic focus turns to ANZBO (Thursday), as well as ANZ-Roy Morgan Consumer Confidence, building permits & another round of comments from RBNZ Gov Orr (Friday).

Fig. 1: NZD/USD vs. NZD/USD1-Month Risk Reversal

Keep reading...Show less