NZD/USD’s positive mid-week momentum has faded on Friday, with the pair falling back below the key 0.6850 support zone into the 0.6820s, where it trades lower on the day by about 0.5%. Though the Dollar Index has not been able to recover back to the north of the 95.00 level on Friday, it has managed to muster a modest recovery from the two-month lows it printed earlier in the session. This improvement in US dollar demand, combined with choppy, mixed conditions in global equities, has weighed on the kiwi and is a principal driver of Friday’s downside in NZD/USD.
Whether Friday’s modest US dollar recovery following heavy selling pressure this week translates into a broader dollar upturn is another question. Certainly, this week’s fundamental developments (hawkish Fed speak, hot consumer and producer inflation) suggests that there is substantial USD upside risk. Friday’s weak US December Retail Sales report and worse than expected January Consumer Sentiment survey have both been ignored by FX markets as not particularly relevant to either the growth outlook or Fed policy. That because 1) US Retail Sales remain historically elevated, even if spending did weaken a little more than expected in December and 2) weak Consumer Sentiment is mostly a function of high inflation.
Upside US dollar risk of course suggests downside NZD/USD risk and the bears will be eyeing a retest of the key 0.6800 area and 21-day moving average just below it at 0.6785. But with the Fed now entering blackout ahead of the January meeting and a lack of tier one US data releases, the US dollar may struggle to find impetus next week. That suggests NZD/USD may have an opportunity to remain rangebound in the 0.6800-0.6900 area, provided that the recent downside in US (and global) equities doesn’t extend.