NZD Rally May Extend into Asia as Data Stabilization Inspires Optimism

New Zealand Dollar, APAC Stocks, Coronavirus – TALKING POINTS

• New Zealand Dollars ascent may continue into Asia – APAC stocks could follow

• Global PMI data is showing signs of stabilization, but is the optimism excessive？

• NZD/JPY flirting with key resistance. Breaking it could open door to 2019-highs

The US session ended yet another day on an optimistic note with the S&P 500 clocking in its fourth consecutive day of gains. It is less than nine percent away from retesting its pre-selloff highs. Despite a myriad of geopolitical risks in Asia, Europe and North America, investors remain steadfast – at least for now – in their bullish outlook.

US-China tensions in particular are escalating in large part due to conflicting foreign policy goals regarding Hong Kong that are spilling over into other areas. Yesterday, Washington announced that it is suspending Chinese airlines from flying into the United States, and Beijing will likely retaliate. However, investors continue to show sentiment resilience in the face of formidable fundamentals.

Their buoyancy, however, is not entirely unfounded. While unemployment – particularly in the US – remains at Depression-era highs, global PMI data has been showing signs of stabilization. The services, manufacturing and composite statistics are showing early signs of bottoming out along with the Citi Group Economic Surprise Index. The latter measures how economic data performs relative to expectations.

Thursdays Asia-Pacific Trading Session

Wall Streets buoyancy may yet again spill over into Asia and help push cycle-sensitive currencies like the New Zealand Dollar higher. Its risk-oriented peers like AUD and emerging market FX may also benefit from optimistic traders looking to capitalize on the markets upward resilience. Credit spreads on sovereign and corporate bond yields may also continue to narrow as part of a broad relaxation in angst over Covid-19.

The sessions losers may also be the same contestants who performed poorly in the US session. These include the anti-risk Japanese Yen and the haven-linked US Dollar. Their appeal in an environment characterized by irrational exuberance is lacking relative to their growth-oriented peers. Having said that, JPY and USD may recover if sentiment deteriorates and their anti-risk nature becomes an alluring feature in uncertain times.

NZD/JPY Analysis

NZD/JPY has rallied over 10 percent after briefly trading sideways and has confidently cleared resistance at 67.766. The pair is now testing a narrow but vital inflection range between 69.897 and 70.030. Clearing that with confirmation could open the door to retesting the December 2019 swing-high range between 73.360 and 73.536. Having said that, upside momentum may fade before that and could lead to a short-term pullback.