The NZD/USD pair collapsed by almost 100 points during the Asian session on Tuesday, showing an impulsive and recoilless decline. It is noteworthy that the New Zealand dollar plummeted before the next meeting of the Reserve Bank of New Zealand. According to the general expectations of the market, the RBNZ will raise the interest rate by 25 basis points, namely to the level of 0.5% at this meeting. The New Zealand Central Bank should become a "pioneer" among the central banks of the leading countries of the world in the context of tightening monetary policy parameters after the coronavirus crisis.
Looking ahead, it should be noted that the sharp decline in NZD/USD is directly related to the coronavirus, which can eventually destroy the plan of buyers of the pair. Ironically, the first case of COVID-19 in many months was discovered in New Zealand just before the RBNZ meeting. Given the fact that even single cases of infection are treated with such seriousness in the country, it is possible to assume the option of maintaining a wait-and-see position on the part of the New Zealand regulator. This scenario of the development of events looks quite real – that is why only 1 registered case of COVID-19 had such a strong impact on the NZD.
The fact is that New Zealand defeated the pandemic at the beginning of this year, stopping the spread of COVID-19. There were isolated cases of the virus on the island, but not within the country – but only among those citizens who returned from abroad (that is, the disease was detected while being quarantined). A strict and peremptory quarantine policy helped New Zealand eliminate COVID-19 inside the country, allowing people to live without any restrictions. In the 5-million-strong state, only 2,500 confirmed cases of coronavirus and 26 deaths related to infection were registered during the entire period of the pandemic. As for vaccination, the island state is not among the leaders here: 1.5 million people (more than 30% of the country's population) received the first dose of Pfizer vaccine, 850 thousand New Zealand citizens (i.e. only 17%) were fully vaccinated.
Given such a background, it is not at all surprising that a new case of coronavirus was discovered yesterday inside the country (the first in the last six months). This made so much noise including among NZD/USD traders, who began to get rid of the New Zealand dollar as a whole.
The country's authorities have not yet tightened quarantine restrictions, but they are conducting an investigation, tracking the contacts of an infected person, and establishing the source of infection. At the same time, the Ministry of Health has already published "urgent recommendations": anyone in Auckland who uses public transport or who cannot socially distance himself in public places should wear a mask as a preventive measure. According to preliminary data, the infected man has not left the country recently, which suggests that the Indian strain still made its way to the island state. As recognized by the Ministry of Health, 100% of cases of COVID-19 detected at the New Zealand border in recent weeks were related to the "delta strain".
Reacting to the above-mentioned news flow, the NZD/USD pair updated the two-and-a-half-week price low, breaking through the support level of 0.7000 and reaching almost the base of the 69th figure. The fundamental picture has changed too dramatically and even more so before the meeting of the New Zealand Central Bank.
After all, "hawkish" expectations prevailed a few days ago and supported the New Zealand dollar, restraining the attack of the US dollar bulls. After the RBNZ announced the termination of the incentive program at the July meeting, which was supposed to be in effect until the summer of 2022, a general opinion emerged on the market: the next step of the regulator will be an increase in the interest rate.
The recent macroeconomic reports only reinforced the "hawkish" expectations. The unemployment rate in New Zealand in the second quarter declined to 4.0%, with a forecast decline to 4.4%. This indicator has been consistently falling over the past three quarters. The indicator of the increase in the number of employees also came out in the "green zone" with the forecast of growth to 0.7%. The indicator came out at the 1% mark (on a quarterly basis).
Similar dynamics were observed in annual terms (+1.7% with a growth forecast of up to 1.2%). The salaries were also pleasing: the average level of wages in the private sector rose by 1.1% (with a growth forecast of up to 0.4%) in quarterly terms. If we talk about inflation, there is also no reason to worry. The consumer price index rose to 1.3% (from the previous value of 0.8%) during the Q2, and to 3.3% on an annualized basis, with a growth forecast of 2.8%.
But despite all the achievements of the New Zealand economy, the "coronavirus factor" can restrain the hawkish impulse of the RBNZ.
In other words, strong macroeconomic reports and the RBNZ's "hawkish" intentions are on the one side of the scale, and on the other side, we have the 1 case of coronavirus, which was registered inside New Zealand. Here, it is impossible to clearly say in which direction these scales will tilt, in the context of the future prospects of the Central Bank's monetary policy.
All this suggests that it is currently advisable to take a wait-and-see position for the NZD/USD pair. The results of tomorrow's RBNZ meeting will provoke increased volatility for the pair, but the only question is if it's favor of the New Zealand dollar or against it. If contrary to fears, the regulator still raises the rate, NZD/USD will rise at least to the upper line of the Bollinger Bands indicator on the daily chart (0.7060). Otherwise, it will impulsively drop by another 100-150 points, to the base of the 0.68 and the possible testing of the 0.67 level. Given this degree of uncertainty, it is advisable for traders of this pair to wait for the results of the RBNZ's August meeting.
