Forex Market: NZD/USD eases from 2 1/2-week highs affected by PBOC’s policy move, US stimulus talks face resistance

NZD/USD eased from last Friday’s 2 1/2-week high in Asian trade on Monday, as the offshore Chinese yuan depreciated following an announcement by the People’s Bank of China that the reserve requirement ratio for financial institutions for foreign exchange forwards trading would be reduced.

Analysts suggest that such a move aims to achieve a lower exchange rate of the Chinese currency.

“Our interpretation is that removing the reserve requirement is intended to encourage firms to hedge in order to manage currency risk,” Khoon Goh, head of Asia Research at Australia and New Zealand Banking Corp, said.

“It also enhances the foreign exchange market structure by making it easier for foreign investors to hedge their onshore portfolio investments.”

Meanwhile, investor risk appetite cooled as negotiations over a US fiscal stimulus package faced resistance. US President Trump on Friday proposed a $1.8 trillion coronavirus aid package, which moved closer to the $2.2 trillion offer by House Speaker Nancy Pelosi. Yet, Trump’s proposal faced criticism from several Republican representatives in the Senate, who expressed concerns about rising US debt. They were also concerned a deal on stimulus could cost Republicans support in the presidential election in November.

“Over the past few days, the markets seem to assume Biden will win the election. Trump seems desperate to get a deal but his comments are getting treated like a noise,” Yusuke Okada, manager of Forex at Mitsubishi Trust Bank, said.

“But I do think we could see a return of political uncertainties by the election. Markets seem to have priced in only the good news.”

In addition, continuing expectations of negative interest rates in New Zealand after dovish remarks by RBNZ officials last week kept the kiwi dollar under some pressure.

As of 8:11 GMT on Monday NZD/USD was inching down 0.08% to trade at 0.6662, after earlier touching an intraday high of 0.6671, or a level not far from last Friday’s 2 1/2-week high of 0.6673. The pair has risen 0.76% so far in October, following a 1.80% slump in September, its first monthly loss since March.

In terms of macro data, no relevant reports are scheduled for release on Monday. US markets are to remain closed for the Columbus Day national holiday.

Bond Yield Spread

The spread between 1-year New Zealand and 1-year US bond yields, which reflects the flow of funds in a short term, equaled 5.4 basis points (0.054%) as of 6:15 GMT on Monday, or unchanged compared to October 9th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6638
R1 – 0.6703
R2 – 0.6738
R3 – 0.6804
R4 – 0.6869

S1 – 0.6602
S2 – 0.6537
S3 – 0.6501
S4 – 0.6466

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