Stay 'Short' New Zealand Dollar says Credit Suisse Trader

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Jonathan Pierce, a currency trader at Credit Suisse, says he remains a seller of the Australian and New Zealand Dollars, particularly in light of Covid news coming out of China.

"The China slowdown has been on the radar for a while. Somehow markets took the Evergrande fiasco in it's stride but it had been clear that cracks were starting to emerge in the worlds growth engine," says Pierce in a daily briefing to clients.

It is reported a Covid outbreak in Beijing has prompted panic buying amidst fears of a lockdown that would be similar in intensity to that imposed on the residents of Shanghai.

On Monday morning, the National Health Commission said that 47 coronavirus cases had been found in Beijing since Friday.

Cases have been spreading in the community for a week, with multiple rounds of transmission, Pang Xinghuo, deputy director of the Center for Disease Control and Prevention in Beijing, said at a news conference on Sunday.

"China’s Covid crisis which is forcing a re-rating of growth expectations in the region. This last theme is mostly behind the sell-off in Asian equities overnight and has forced a correction in three of the currencies that had emerged as outperformers in the first phase of the Ukrainian conflict; the Chinese yuan, Australian dollar and New Zealand dollar," says Francesco Pesole, FX Strategist at ING.

China is New Zealand and Australia's largest and key export market, therefore fears of a significant growth slowdown linked to Covid could impact negatively on the country's economy.

The New Zealand and Australian Dollars therefore often serves as a bellwether for investor sentiment towards China.

Above: GBP/NZD (top) and NZD/USD (bottom) at daily intervals.

Credit Suisse's Pierce says it had been hoped that People's Bank of China (PBoC) easing measures could keep the economy chugging along towards its growth targets but now it is clear that China has stalled.

The Chinese Yuan has fallen sharply of late too, indicating investor sentiment on the country is deteriorating sharply.

"CNH is the canary in the coal mine," says Pierce.

He says China generally keeps the Yuan stable, the sudden devaluation shows that they are losing control of the slowdown in their economy and have been forced to release some pressure via a weaker currency.

The global economy is facing a list of troubles which include the war in Ukraine, surging inflation, rising interest rates at the Federal Reserve and global supply chain disruptions.

Lockdowns in China will only exacerbate global headwinds.

"I feel this is the start of a broader risk off move," says Pierce. "Commodities that have had such a strong rally on supply concerns are now pulling back sharply as they see the demand side of the equation deteriorate, Iron Ore falling nearly 12% overnight."

The Credit Suisse analyst says the PBoC are likely to be intervening in global currency markets to prevent a more rapid fall in Yuan which could mean they will be buying dollars against G10 as they recycle the dollars they sell against the Yuan to balance their reserves.

As such they expecting the U.S. Dollar to stay in demand.

Regarding the outlook for the New Zealand Dollar: "I am staying short AUDUSD and NZDUSD... Canada less exposed to China slowdown so my main bias is for AUD and NZD lower."

At the time of writing the Pound to New Zealand Dollar rate is at 1.9277, the New Zealand to U.S. Dollar exchange rate is at 0.6594. (Set your FX rate alerts here).