Feels like we're back at the start of the pandemic when a single case caused alarm
NZD/USD is down 0.7% or 51 pips after New Zealand reported a locally transmitted case of covid-19 in Auckland.
New Zealand is the sole developed-market holdout against covid in what has been a wonderfully-successful mitigation strategy. However delta is a formidable opponent and even one case can quickly spiral. The market will be on edge for the next few days, especially with the RBNZ decision tomorrow.
The OIS market is now pricing in a less than 100% chance of a hike. I expect this puts an end to the talk of a 50 bps cut as well (it was at 20%).
Lately, AUD/NZD shorts have been popular trade on the recent divergence on covid fortunes so there's some dry powder to quickly unwind. At the same time, we're talking about a single case and they have a decent shot at halting the spread and buying themselves more time to get more people vaccinated. At this point, I don't believe that total suppression is a long-term strategy anywhere, they're just trying to get 70-80% of people vaccinated before giving up.
So where to go for NZD/USD? There isn't much space between spot and the 0.6875 low in July and if 1 case turns into 5 or 10, then that should fall. At the same time, the US dollar faces a risk of its own today with retail sales data for July due.
Some might say a more straight-forward trade may be NZD/JPY and there a break of 75.00 may open the way for a 300-500 pip fall.
Overall though, I'm not sure that covid in New Zealand is really going to dictate the NZD trade. There is growing unease about global growth and covid. The reflation trade is slipping and sentiment is souring about ever getting back to 'normal'.
The best trade may be an unwind of the divergence in AUD/NZD. This pair almost precisely bounced off the November low (it's almost spooky, to be honest). If New Zealand finds itself in the same situation as Australia, then it's back to 1.06 or 1.07.
