NZD Pairs Ride the Yield Differential Wave

The Kiwi dollar was yet again the strongest major by yesterday’s close. October’s credit card spending rose 9.5% for the month, which is taking spending back to levels not seen since before the pandemic, according to Statistics New Zealand. It is also the largest monthly increase since June 2020. Durables accounted for the baulk of spending, with only retail consumables (take-outs) being the only slight negative on the month.

Overall, NZ data has beaten expectations.

Unemployment fell to a record low of 3.4% in Q3, down from 4% in Q2 and smashing expectations of 3.9%. Job growth also rose by 2%. This also followed on from a strong inflation report which saw CPI rise to 4.9% y/y, more than double their 2% target and much higher than Q2’s 3.3%.

We could go on, but the easiest way to see how strong New Zealand’s economic data has been of late is to look at the CESI (City Economic Surprise Index). Sitting near record highs, the CESI shows that data on aggregate has far exceeded forecasts. Furthermore, the CitiFX inflation surprise indicator is at a record high for New Zealand, which piles further pressure on RBNZ to act at their next meeting on November 23^rd.

RBNZ could soon increase the yield differential advantage for NZD pairs

As things stand, RBNZ already have the highest base rate among the FX major banks and this give NZD the advantage of yield differentials during times of risk-on. However, as expectations for another hike are rising, bond yields are also rising at a faster pace than their peers, which is providing another pillar of strength for NZD pairs.

Should expectations for a hike remain and appetite risk remain favourable then traders are likely to take advantage of carry trades, where they buy the currency with the higher interest rate and short currencies with lower (or even negative) interest rates. So, from this logic, short EUR/NZD or long NZD/JPY and NZD/CHF seems a sensible choice.

EUR/NZD also ticks a few boxes for bears from a technical perspective. The cross remains in an established downtrend and is within a consolidation phase after breaking beneath the March 2019 and Feb 2021 lows. Two upper spikes have formed a double top at resistance (previous support), with a bearish hammer forming at the 20-day eMA and below the monthly pivot point. Furthermore, yesterday’s selloff is part of a 3-bar bullish reversal called an evening start pattern.

NZD/CHF appears to have formed a corrective low. The cross established a base around its 200-eMA after breaking out of its bullish channel, and its recent pullback has now printed a 3-bar bullish reversal above the 200-day eMA which shows an increase in momentum. Due to the deeper pullbacks on this pair is seems to be more suited to a swing trading style. Our bias is bullish above the retracement ow with initial target back near the cycle high at 0.6634.

How to trade with City Index

You can trade easily trade with City Index by using these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.