- NZD/USD edged lower for the second straight day and dropped to a one-month low on Friday.
- The risk-on mood was seen as a key factor driving flows away from the perceived riskier kiwi.
- Retreating US bond yields kept the USD bulls on the defensive and could help limit the downfall.
The NZD/USD pair continued losing ground through the Asian session and dropped to a one-month low, around the 0.6725 region in the last hour.
The pair added to the previous day's losses and witnessed some follow-through selling for the second successive day on Friday. This also marked the third day of a negative move in the previous four sessions and was sponsored by the prevalent risk-off mood, which tends to drive flows away from the perceived riskier kiwi.
The global risk sentiment took a hit amid expectations that the Fed will tighten its policy at a faster pace than anticipated. In fact, the markets have fully priced in an eventual Fed lift-off in March and a total of four hikes in 2022, fueling concerns that rising borrowing costs could dent the earnings outlook for companies.
Meanwhile, hawkish Fed expectations acted as a tailwind for the US dollar, which was seen as another factor that exerted pressure on the NZD/USD pair. That said, a sharp pullback in the US Treasury bond yields – triggered by the global flight to safety – capped gains for the greenback and might help limit deeper losses for the major.
Investors might also prefer to move on the sidelines and wait for a fresh catalyst from the upcoming FOMC monetary policy meeting on January 25-26. The outcome will be looked upon for clearer signals about the likely timing when the Fed will commence its rate hike cycle, which will provide a fresh directional impetus to the buck and the NZD/USD pair.
Nevertheless, the fundamental backdrop seems tilted in favour of bearish traders and supports prospects for additional losses. Hence, a subsequent fall back towards challenging 2021 low, around the 0.6700 round-figure mark, remains a distinct possibility amid absent relevant market moving economic releases from the US.
