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Kiwi on Defensive With Rally Buffeted by Global Virus Headwinds

David Finnerty

(Bloomberg) -- A broad risk aversion spurred by concerns over a second wave of coronavirus infections in the U.S. is eroding gains in the New Zealand dollar, pushing it down to a key support level seen at the start of the month.

The kiwi rose to a four-month high last week as the reopening of the economy and the dearth of virus cases in New Zealand spurred optimism. Some of the gains though were pared when concerns about the U.S. eclipsed domestic tailwinds.

The currency was vulnerable to the drop given that it was in overbought territory, according to its slow stochastics, a momentum indicator. It still remains susceptible to more declines, with a possibility of retesting a support level around 62.40 U.S. cents, the upper boundary of its April-May trading range, in the near-term.

“While we can explain much of the strong recent recovery in the NZD -- namely its positive leverage to the global economic cycle -- it looks a little over-bought in the short term, having overshot our fair value estimate of about 0.63,” said Jason Wong, currency strategist at Bank of New Zealand in Wellington.

Investors who remain bullish on the New Zealand dollar will be looking for the country’s consumer confidence data this week, to see if it could help reassert demand for the kiwi by showing that the nation’s animal spirits are alive and well.

New Zealand’s abandoning of social distancing requirements have stoked expectations of a quicker economic rebound and quashed prospects of negative policy rate. The market now sees just an 18% probability of a quarter point cut by November.

“Some consolidation is expected through the rest of the month,” said Wong. “If USD weakness intensified, it could run a little higher, but in the absence of that, it is apt to flatline or recede a little over the next few weeks.”

Below are the key Asian economic data and events due this week:

Monday, June 15: New Zealand house sales and performance services index, China industrial production, retail sales and fixed assets ex rural, Indonesia trade balance, India wholesale prices and trade balanceTuesday, June 16: RBA minutes, Australia weekly payrolls and 1Q house price index, New Zealand consumer confidence, Bank of Japan policy decisionWednesday, June 17: New Zealand 1Q BoP current account, Japan trade balance, Singapore non-oil domestic exportsThursday, June 18: Australian employment, New Zealand 1Q GDP, Bank Indonesia policy decisionFriday, June 19: Australia preliminary retail sales, Japan CPI, BOJ minutes of April meeting, Philippine BoP overall

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