New Zealand Dollar Outlook: NZD/USD, AUD/NZD React to Covid Risks, RBNZ Policy Bets

• New Zealand Dollar weakens against peers as regional risks threaten RBNZ policy bets

• Australias Covid outbreak sees trans-Tasman travel bubble ban third state

• NZD/USD pushed lower but bullish RSI divergence may see prices rise soon

WEDNESDAYS ASIA-PACIFIC OUTLOOK

Asia-Pacific markets will likely see a move back into risk assets on Wednesday after the New York trading session saw equity markets recover from a global selloff. The highly infectious Delta Covid variant has economists fearing a potential slowdown in global growth as key economies ramp up lockdown measures. Risk-sensitive currencies like the Australian Dollar and New Zealand Dollar weakened further overnight.

More than half of Australia‘s population is under lockdown, further endangering the country’s economic recovery. On Tuesday, South Australia went into a seven-day lockdown, triggered by five positive cases. The state of Victoria extended its own lockdown by a week. Meanwhile, Sydney‘s metro area in New South Wales isn’t set to lift restrictions until July 30, assuming cases are near zero near that time.

New Zealand will ban quarantine-free travel from South Australia in response to the outbreak. New South Wales and Victoria are also currently banned from the trans-Tasman travel bubble. The New Zealand Dollar has performed well in recent weeks, bolstered by rising RBNZ rate hike bets as inflation picked up. However, after five consecutive weeks, the Kiwi Dollar is slipping against the Australia Dollar. A tightening yield differential, measured as the difference between respective 10-year government bond yields, shows traders may be scaling back on bets for the RBNZ to lift rates.

The Reserve Bank of Australias July meeting minutes, released on Tuesday, noted the possibility for Covid-related restrictions through mid-year. However, the central bank sees its accommodative policy settings cushioning the economy, along with stronger household balance sheets and a pickup in vaccinations. June retail sales are set to cross the wires today. The consensus forecast sees a 0.5% m/m drop, down from 0.4% in May. Aussie Dollar traders will key in on the data to gauge consumption strength, which is highly susceptible to lockdowns that picked up in late June.

Outside of the Australian data, Thailand will report trade figures for June at 03:30 GMT. The economic docket is empty for the rest of the session, which will leave the mild rebound in sentiment in the drivers seat outside of breaking news items. A better-than-expected print from Australian retail sales may bode well for regional sentiment, although statements regarding lockdowns from policy makers will likely take precedent.

Elsewhere, oil markets remain in the gutter after data from the American Petroleum Institute (API) showed a surprise build in crude oil inventories for the week ending July 16. Energy analysts were looking for a draw of slightly more than 4 million barrels, but a 0.806 million build crossed the wires. Crude and Brent benchmarks reacted to the downside, extinguishing hopes for a quick rebound in prices. The Energy Information Administration (EIA) will release its own inventory numbers tomorrow.

NZD/USD TECHNICAL OUTLOOK:

The New Zealand Dollar dropped to a fresh 2021 low versus the US Dollar overnight before recovering a portion of its losses. Still, NZD/USD remains slightly lower on the day. However, positive RSI divergence has emerged as prices hit lower lows while the oscillator did not, which suggests downside momentum is weakening. That could lead to a turn higher, with the falling 26-day Exponential Moving Average (EMA) as likely resistance to the upside.

NZD/USD 8-HOUR CHART