The NZDUSD climbed to six-week highs last week as US bond yields eased and global PMI numbers jumped, signalling that the powerfully positive conditions seen at the end of 2020 had returned – at least for now.
Financial markets had turned shaky in the first quarter of 2021 as US bond yields jumped.
The benchmark US ten-year bond yield hit 14-month highs at the end of March. The US Federal Reserve’s statements, signalling rates would stay low, had little effect on the strong rise in US bond yields.
The US ten-year bond yield has climbed from 0.90% at the start of the year to as high as 1.75% last month.
Bond yields the driver in Asia
The move in bond yields unsettled sharemarkets and boosted the US dollar.
Key Asian FX markets were weaker.
Emerging FX markets sentiment is traditionally tied to US bond yields as much of their overseas debt is priced in US dollars. A rise in the US dollar causes interest payments to grow and threaten government budgets.
The NZD was also recently weaker with New Zealand’s relatively high local rates making the currency also sensitive to moves in US rates.
Recovery
US bond yields have eased in the last few weeks, however, and this has seen the NZD recover.
From a more hopeful perspective, the jump in US bond yields looks to have been driven by a sharp re-rating of US growth hopes, thanks mainly to President Joe Biden’s massive USD1.9t trillion stimulus package.
On the other hand, a gloomier view suggests the rise is due to inflation fears.
We’ll only know for sure in a few months – and the eventual answer will have a major impact on the NZD and other major financial markets.
Good news
The other driver of a higher NZD last week was a powerful result from the global PMI reports.
The purchasing manager index (PMI) numbers are seen as the most up-to-date reading of the global economy.
We had a clean-sweep of good news from Friday’s PMI numbers with very strong results seen from the UK, France and most notably the US, which saw its highest ever reading.
A super-charged recovery, as signalled by these powerful PMI numbers, should boost the NZD and Asian FX – as long as higher US bond yields don’t get in the way.
By Steven Dooley, APAC Currency Strategist – Western Union Business Solutions. You can contact him here.
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