Kiwi Explained: Last nights volatility stemmed from poor liquidity and option trades with AUD/NZD

A busy Tuesday morning for the MarketPulse team included a debate over what was the trigger with the overnight move with the New Zealand dollar.  The headlines were plentiful overnight:

  • New Zealand PM Ardern: Confirmed all areas outside of Auckland will leave coronavirus alert level 4 on Sept 1st, and move to level 3 on Sept 2nd
  • New Zealand COVID cases fell for a second day from 53 to 49 new cases
  • August ANZ Business Confidence declined from -3.8 to -14.2
  • July Building permits Month over month fell from a revised 4.0% to 2.1%
  • A magnitude 6.5 earthquake hit the Kermadec Islands region near New Zealand

All these headlines are important but were unlikely to be the primary driver with kiwi volatility.  Given the timing of the currency volatility and after you analyze all the kiwi crosses, it appears that rally with the New Zealand dollar stemmed after AUD/NZD plunge below the 1.04 level.  The timing occurred during one of the lowest liquidity times of day and likely punished options traders that were looking for the 1.04 level to hold.  The plunge and paring of gains suggest algos and high-frequency trading systems took advantage of the illiquid conditions.

The New Zealand dollar is today’s best performing currency, with NZD/USD rising 0.8% to 0.7053.

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Ed Moya

Ed Moya

Contributing Author at OANDA
With more than 20 years’ trading experience, Ed Moya was a Senior Market Analyst with OANDA for the Americas from November 2018 to November 2023. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Prior to OANDA he worked with, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business, cheddar news, and CoinDesk TV. His views are trusted by the world’s most respected global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Seeking Alpha, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.