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Market risk has declined significantly, and the New Zealand Dollar stands to benefit as a result.
The New Zealand Dollar can build on recent strength as global risk sentiment declines in the wake of a series of trade deals.
Crédit Agricole's bespoke Risk Index has slipped further into "risk seeking territory" according to an update from the bank, and a building downtrend advocates for further easing.
The index slipped through July after "a series of bilateral trade deals between the US and its trading partners has bolstered market sentiment," says David Forrester, Senior FX Strategist at Crédit Agricole.
Forrester says the New Zealand Dollar stands out as a potential beneficiary in such an environment:
"The AUD & NZD have the strongest negative correlations with our Risk Index. The JPY has the strongest positive correlation with the Index."
Further declines in market fears look set to continue, with market measures of implied volatility through the month of August showing limited events on the radar that can upset this lull. This can allow risk-sensitive currencies like the NZ Dollar to build on recent gains owing to their relationship with sentiment.
Volatility measures show investors expect risk to pick up again in September, as it does every year with the return of traders from their summer holidays.
Although sentiment appears to be in the NZ Dollar's camp, those watching the main New Zealand exchange rates will be frustrated by the lack of traction in either direction.
The charts show the major exchange rates sticking to recent ranges, particularly NZD/USD and GBP/NZD, which is understandable given the USD is a winner of the progress made on trade; after all, severe tariffs would be costly for U.S. consumers and bad for the economy.
Similar to the NZD, the GBP also benefits when risk sentiment improves, which means Sterling is being shored up alongside the Kiwi, locking the GBP/NZD into a range.
A catalyst is needed to trigger more enduring trends in these exchange rates, but at least the current setup offers some relative predictability in the near term for those looking to make NZD-related payments.