NZD Still Lagging Improved Yield Differential Backdrop

NZD has seen somewhat of a relief rally. We sit back at 0.6075, which is very close to overnight highs and +1.3% above yesterday's lows. Like the rest of the G10 complex, the kiwi benefited from softer USD sentiment, although the currency is still only middle of the pack in terms of performance over the past 24 hours.

• For NZD/USD, the yield differential picture is looking a little more supportive, see the chart below. This is likely to remain the case even if we see some catch up to the downside in terms of NZ yields today, following offshore moves. US and UK front end yields saw sharp falls.
• The correlation also hasn't been that strong between the two series over the past month or so, but is more elevated from a longer term standpoint, which is to be expected.
• Moves above 0.6120 have drawn selling interest this past week for NZD/USD so that level will be watched on the topside. On the downside, expect to see support around the 0.6000 level.
• Locally, we have Q2 manufacturing activity on tap today, due out shortly. There is no consensus for this print, the Q1 print was -3.5% q/q for volumes and +1.2% q/q for activity. (We stated yesterday that this data was due to print, but misread the date).
• Elsewhere locally, NZ will decide at a meeting next week (12th of September) on whether to scrap remaining covid restrictions, according to local media reports. This would include the so-called traffic light system and mask mandates in most settings.

Fig 1: NZD/USD & NZ-US 2yr Government Bond Yield Differential

Source: MNI - Market News/Bloomberg