A sharp drop in FX market and equity market volatility expectations bodes well for the highly risk-sensitive New Zealand Dollar, and recent momentum favors further short-term gains. In fact, our DailyFX 1-week Volatility Index has recently seen its largest peak-to-trough decline since the aftermath of the Lehman Brothers bankruptcy in late 2008. Such a noteworthy drop in forex market volatility expectations suggests we are entering somewhat of a summer lull. If markets predict that the New Zealand Dollar will see little volatility against the US Dollar, speculators will be more willing to collect the relatively high interest rates on NZDUSD-long positions.
Of course, any noteworthy deterioration in financial market risk sentiment and commensurate jump in vols would derail such demand. Barring any surprises, the NZD stands to gain further through upcoming trade. Traders should keep an eye out for market reactions to a potentially market-moving US Federal Open Market Committee rate announcement. Yet New Zealand’s own economic releases—though ostensibly significant—are less likely to force extreme short-term moves in said currency. - DR
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