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#1 06-08-2020 10:19:59

johnedward
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From: Paris - France
Registered: 21-12-2009
Posts: 2910
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NZD: the dollar is supported by solid employment data

NZD: the dollar is supported by solid employment data


The NZD (New Zealand dollar) has been on fire lately, despite efforts to move away from a stronger currency in times of recession.

The latest employment data from New Zealand confirms a potential recovery. The island has managed the virus situation in an exemplary manner, winning the admiration of the world.

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Emerging versus developed currencies

We should distinguish between developed market currencies and emerging market currencies. Emerging market currencies have come under a lot of pressure recently, as debt is accumulating faster than in developed countries.

As most debt is denominated in USD, next year will be a difficult one for debt service. It is only until the end of this year that about USD $3.6 trillion of emerging market debt will mature. This is why investors are preparing in advance and exiting emerging currencies.

Why is the NZD so attractive?

Firstly, location. Neighbouring Australia and close to a region that has better managed the pandemic, the NZD is an obvious choice.

Second, the way it has handled the virus so far is exceptional. Fewer cases, more control, economic growth can resume.

Thirdly, this week's employment data shows that the economy is recovering strongly. The unemployment rate has fallen to 3.9% and looks set to improve further. In addition, inflation is stable or even non-existent.

However, it was the NZD that rose the most against the USD. The Australian dollar, for example, outperformed due to greater exposure to Asian economies and a strong presence of commodities. After all, Gold surpassed the $2,000 mark this week, and commodity prices followed suit. As a commodity exporter, the Australian economy should benefit the most from this.

Returning to the NZD, the flagship pair, the NZD/USD, is closely in tune with the U.S. equity markets. As we are in August, the direct correlation is likely to continue.

However, keep an eye on this week's U.S. data. A positive employment report today should be positive for equities, but also for the Dollar. Will the NZD/USD and other dollar pairs break the correlation?

Until today, this is unlikely to happen. Trading algorithms push prices up to the point where it no longer makes sense. This is not the first time this has happened and it has nothing to do with the virus's price action. Rather, it is typical price action for this summer month, when risk dominates the market.

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"Anything worth having is worth going for - all the way." - J.R. Ewing

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