NZD/USD is ripe for a pullback as complacency risks remain

The NZD/USD pair rose to its January highs as investors braced for more economic activity in New Zealand. That is after the government ended social distancing measures and declared victory over the pandemic. The pair is trading at 0.6560, which is the highest it has been since January this year.

New Zealand ends social distancing

New Zealand has been praised for its actions to fight the coronavirus pandemic. The country put in place strict social distancing measures early on and deployed security forces to ensure compliance. As a result, the country of more than 5 million residents had only 1,504 cases and 22 deaths.

In a statement yesterday, Jacinda Arden lifted all restrictions on people and businesses after the last patient recovered. The country will only have strict border controls to keep the virus out. In the statement, she said:

“Our goal was to move out the other side as quickly and as safely as we could. We now have a head-start on our economic recovery.”

As a result, investors piled back to the New Zealand dollar and the country’s stocks. The top 50 index, which tracks the 50 biggest firms in the country, has erased all losses made earlier this year. It is also one of the best-performing indices in the world.

In the statement, Arden urged people working at home to go back to work. She also said that the country’s beloved rugby league would welcome crowds this weekend.

The removal of social distancing measures will boost business and consumer confidence. According to ANZ, consumer confidence bounced back by 12 points in May. Business confidence rose by 9 points as more companies remained hopeful about the reopening of the economy.

Also, there are signs that the country’s status as a virus-free haven will be positive for the economy.

NZD/USD risks as New Zealand reopens

New Zealand has put in place measures to cushion the economy. For example, the government has unveiled a fiscal stimulus worth about $62 billion or 20% of GDP. Most of the funds went to help businesses pay their employee wages, tax cuts, and income support.

At the same time, the central bank has brought interest rates to historic lows and initiated a $37 billion quantitative easing program. The bank has also talked about the possibility of negative interest rates and boosting its asset purchase program.

Still, New Zealand faces several key risks. First, there is a risk of a second wave of coronavirus infections now that the world does not have a vaccine or therapy. In recent days, we have seen spikes of cases in countries like South Korea and Hong Kong.

Second, even with the reopening, some industries will continue to see low or no growth. For example, the tourism industry that employs thousands of New Zealanders will take months or years to recover. The industry is also the biggest source of foreign exchange. The GDP is still expected to drop by 23% in the second quarter. In a statement, an analyst told Bloomberg that:

“Even if we eliminate the virus, there is the risk the global pandemic rages for years, not months, in which case there would be a limit to how strong the New Zealand economy can grow.”

NZD/USD technical outlook

The NZD/USD pair has been on a strong upward trend and is trading at the highest point since January 29. On the daily chart, the price is above the 50-day and 100-day exponential moving average and above the 78.2% Fibonacci retracement level. The RSI, which is an important indicator, has moved to 78, its highest level since December 2019. That means that while the NZD/USD pair may continue rising, there is a likelihood of a pullback. This could happen depending on tomorrow’s Fed interest rate decision.