NZD/USD retreats from a multi-month high set on Thursday, though the downside seems limited.
China’s COVID-19 woes weigh on investors’ sentiment and dent demand for the risk-sensitive Kiwi.
Bets for less aggressive Fed rate hikes should act as a headwind for the USD and help limit losses.

The NZD/USD pair comes under some selling pressure on Friday and reverses the previous day’s positive move to the 0.6300 neighbourhood, or its highest level since August 18. The intraday downtick extends through the first half of the European session and drags spot prices to a fresh daily low, back below mid-0.6200s in the last hour.

Worries about the worsening COVID-19 situation in China keep a lid on the recent optimistic move in the markets and turn out to be a key factor undermining the risk-sensitive Kiwi. In fact, China announced strict curbs in several major cities in the wake of a record-high jump in daily COVID-19 cases. The developments add to concerns about a further slowdown in economic activity and temper investors’ appetite for perceived riskier assets.

The downside for the NZD/USD pair, however, is more likely to be limited amid the underlying bearish sentiment surrounding the US Dollar. The November Federal Open Market Committee (FOMC) meeting minutes released on Wednesday revealed that officials were largely satisfied they could stop front-loading the rate increases. This, in turn, reaffirms bets for a 50 bps lift-off in December, which leads to a further slide in the US Treasury bond yields and might continue to weigh on the buck.

Apart from this, an unprecedented 75 bps rate hike by the Reserve Bank of New Zealand (RBNZ) on Wednesday supports prospects for the emergence of some dip-buying around the NZD/USD pair. Hence, it will be prudent to wait for strong follow-through selling before positioning for a deeper pullback amid absent relevant economic data and thin trading volumes. Nevertheless, spot prices remain on track to post gains for the sixth successive week.

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