NZD/USD reversal extends to 0.6000 amid a sour market sentiment
- Fears about the global trade outlook have crushed risk appetite on Monday and are weighing on the NZD.
- Trump is sending letters today, informing trading partners of the tariffs applied to their products.
- The RBNZ is expected to deliver a "dovish hold" this week, which might add pressure to the Kiwi.
Risk aversion is driving markets on Monday as Trump prepares letters informing trade partners of the tariffs on their products. The sentiment and trade-sensitive New Zealand Dollar has accelerated its reversal from last week’s high, at 0.6120, and is testing the 0.6000 psychological level at the time of writing.
Comments by the US Administration announced that countries that did not cut deals with the US will be back to the levies announced in April, but it is unclear whether the deadline is the original July 9 or August 1, as the US Treasury Secretary, Scott Bessent announced earlier today.
Tariffs and trade uncertainty are hitting the risk-sensitive Kiwi
Investors, however, have reacted with risk aversion, rushing into safe assets to the detriment of riskier perceived currencies like the Kiwi. Higher levies on exports to the US and a significant disruption in global trade, as US tariffs might be responded to with similar ones by the targeted countries, are likely to weigh on a trade-oriented economy like New Zealand’s.
dovishly tilted
The economic calendar in the US and New Zealand is light today, but the market is bracing for the RBNZ’s monetary policy decision later this week. The bank is expected to leave interest rates on hold but also to convey a dovishly tilted message, pointing to the downside risks to the economy stemming from the uncertain trade scenario.
The US Dollar, on the other hand, remains weighed by a mix of tariff uncertainty and growing concerns about the sustainability of its Government debt, following the approval of Trump’s “Big, Beautiful Tax Bill”. These fears have offset the bright employment figures seen last week and are keeping the pair from dropping further in the current adverse scenario.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.