Global equity markets witnessed a sharp rally on 17 April after US President Donald Trump laid out a road map to reopen the economy hit by coronavirus outbreak. Additional reports of positive results from the patients with COVID-19 symptoms that were being treated with a drug made by US company Gilead Sciences supported Tokyo and Seoul markets to surge and boosted investor sentiment.
US stocks rallied with the Dow Jones Industrial Average surged 3%, S&P 500 has recovered from an early fall to gain 2.7%, and Nasdaq Composite added 1.4% lifted by the optimism of reopening of the American economy.
Medical news website STAT stated that most of the 125 COVID-19 patients treated with Gilead’s drug named remdesivir had recovered and discharged quoting a recorded discussion between doctors in a clinical trial. However, Gilead said that anecdotal reports do not give any data to determine the safety or effectiveness of the drug as a treatment for COVID-19 and is setting hopes for more data by the month-end.
However, China’s weakest economic growth data at 6.8% for the first quarter due to coronavirus lockdown had improved during March, which further enhanced the risk-appetite of investors.
European markets also traded in the green. Euro Stoxx 50 was up by 3.3% on 17 April.
In oil markets, oil prices fell as gains arising from the news of US announcing plans on restarting the economy outweighed China’s worst quarterly economic growth data. US crude fell by 8% reaching to $18.27 a barrel while Brent crude gained 0.93% closing to trade at $28.08 per barrel.
Developed markets have reached a peak in COVID-19 cases, and their focus is now to reopen their economies, particularly, Europe and the US. The key remains testing and tracing population and maintaining adequate healthcare capacity to manage new outbreaks. Many countries looking to exit lockdown slowly and returning to their normal at a different pace can prove to be volatile for some exchange rates.
Dollar plunges but remains elevated
The dollar plunged on 17 April on the news of COVID-19 treatment drug trial showing promising results and plans of reopening US economy sparked optimism and risk appetite amongst investors.
US Dollar Index Futures that tracks the greenback against a basket of 6 other currencies fell 0.26% to 99.83. The dip reversed the previous two days gain of the dollar after warning of worst economic contraction since the Great Depression.
The overall dollar remained in an elevated territory since it is a safe haven currency. Subsequently, it is expected to be in demand as about 22 million Americans have claimed unemployment benefits over the previous month as per the latest data.
Market set-up remains largely unclear during the medium-term as the discussion around easing of social distancing rules is constantly restarting expectations of a sharp V-shaped recovery.
NZ dollar lifts up
New Zealand stock market NZX 50 was up 2.9% at 10,778.72 rising for the 4th session. The market is on the course of its biggest weekly gain.
New Zealand dollar, also known as the kiwi, is highly sensitive to global risk sentiment as New Zealand is a small open economy making kiwi rise when markets are optimistic and fall when markets panic.
On 17 April, Kiwi was amongst the top performers amid risk-appetite. The kiwi advanced to 60.26 US cents, up 0.9% from its previous close at 59.71 US cents and continuous falls for past 3 days. The earlier underperformance in kiwi was as a result of RBNZ employing unconventional tools and statement to upsize its quantitative easing programme if required and not ruling out the possibility of negative interest rates.
The gains were realised during the Asian session due to improvement in global market sentiment on the hopes of treatment for COVID-19. Also, the US dollar has bounced to a lower side against many European currencies which further augmented NZD/USD.
Factors to affect NZ dollar
The kiwi currency holds a bullish tone in the very short-term. On 16 April, the currency bottomed out at 0.5919, and since then it has been moving upward. It closed at 0.6024 on 17 April.
Economic growth forecasts have been slashed for countries all around the world due to the adverse effects of coronavirus pandemic on economies. Apart from slowing global growth, as per Treasury Secretary of NZ, NZ annual average GDP growth is also forecasted to fall by meagre 0.5% or massive 23.5% for the fiscal year ending 30 June 2021 dependent on the extent of lockdown measures implemented by the government. This is likely to weigh heavily on the NZ dollar.
Government of New Zealand has rolled out $8.9 billion worth of schemes to wriggle out its economy from the economic fallouts of COVID-19.
The investor's sentiment improved after the country moved to Alert level 3 from Alert level 4 on 16 April, easing up the lockdown measures and opening its economy. This has aided the NZ dollar and is expected to further help the dollar to recover as further measures are taken to reopen the economy.
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Recently, China reported the worst economic contraction for the first quarter due to coronavirus could likely undermine the bounce back in the exchange rate. New Zealand is majorly an exporter of dairy products. The demand for dairy products will rise in China eventually once the virus slows down in the country and subsequently, a rebound in kiwi exports. However, if the slowdown in China continues to persist for a longer period than expected, kiwi will be pressurised as domestic demand remains subdued.
Overall, the NZ dollar being a risk-sensitive currency remains vulnerable to the global market movements and risk sentiments.