Roger J Kerr says the sentiment towards, and direction of, the US dollar currency value remains firmly negative

• Summary of key points: -

• Weaker US economic data continues to weigh the US Dollar down
• Chart-Technicals also turn US dollar bearish
• Australian and New Zealand inflation numbers out this week

Weaker US economic data continues to weigh the US Dollar down

It has been an up and down last week for US equities, US bonds and the NZD/USD exchange rate, however the sentiment towards, and direction of, the US dollar currency value remains firmly negative.

The US dollar downtrend, which commenced last October, remains on track with recent weaker US economic data validating and confirming that the USD still has further to depreciate from the current USD Index level of 101.74. The weaker data cannot be surprising to anyone, as households and businesses in the US adjust spending and investment decisions in response to the much tighter monetary policy conditions implemented by the Federal Reserve over the first nine months of 2022.

The FX markets and the US short-term interest rate market are already pricing-in somewhere between a soft and hard landing for the US economy. They are also already pricing-in the likelihood of the Fed pausing on interest rate increases over coming months and potentially cutting interest rates in early 2024. The Fed officials are still stating that interest rates have to remain higher for longer, however they all concede that inflation has been trending lower than what they expected over recent months.

Over the last 10 days, the following US economic indicators have all printed weaker than forecast: -

• 13 January: Annual headline inflation to December +6.50%, compared to +7.1% in November.
• 19 January: Retail sales for December -1.10%, compared to forecasts of -0.40%.
• 19 January: PPI Wholesale Prices year to December +6.20%, compared to forecasts of +6.90% .
• 19 January: Industrial Production for the month of December was -0.70%, compared to forecasts of -0.30%.
• 20 January: New Building Permits for December -1.60%, compared to forecasts of +3.70%

Over the next 15 days, the following US economic data releases will send the US dollar lower still if they also print on the “weaker than expected” side: -

• 25 January: S&P Manufacturing PMI for December, forecast to be lower at 45.0 (previous 46.2).
• 27 January: GDP growth for the December quarter. Forecast +2.70% (previous +3.20%).
• 28 January: PCE Price Index year to December. Forecast +5.10% (previous +5.50%).
• 1 February: Case-Shiller House Price Index for November. Forecast +6.50% (previous +8.60%).
• 2 February: ISM Manufacturing PMI for January. Forecast 48.0 (previous 48.4).
• 2 February: Job Vacancies December. Forecast 9.5 million (previous 10.4 million).
• 4 February: Non-Farm Payrolls Employment increase for January. Forecast +190,000 (previous +223,00).

In between all of that, the Federal Reserve will increase their Fed Funds interest rate by a lower 0.25% to a targeted range of 4.50%-4.75% on 2 February at the FOMC meeting. Tellingly, the two-year interest rate swap rates in the US are pricing much lower at 4.18%, factoring-in interest rate cuts in 2024.

Chart-Technicals also turn US dollar bearish

The US dollar slide against all currencies (as measured by the USD “Dixy” Index) reached an important milestone last week. In the chart below with 50-day and 200-day moving averages, the dreaded “Death Cross” occurred when the  50-day moving average line (red line) crossed below the 200-day moving average line (green line). The cross confirms a clear US dollar downtrend, that still has further to run as investors, traders and speculators still holding “long-USD” positions are forced by the chartist-technical signal to unwind (i.e. sell USD’s).

Since 2018 the USD Index has displayed three clear trends: -

USD uptrends:-

May 2018 to January 2020 (90 100) – red line above the green line

July 2021 to October 2022 (90 to 114) – red line above the green line.

USD downtrends:-

May 2020 to May 2021 (100 to 90) – red line below the green line

The current USD downtrend commenced in October 2022 when it peaked-out at 114. On the closing interest rate differential against the Euro, weaker economic fundamentals and the bearish chart signals, the USD Index is poised to depreciate further to the 95.0 area (if not 90.0) over coming months.

Australian and New Zealand inflation numbers out this week

Inflation data releases for the December quarter on both sides of the Tasman on Wednesday 25th January should generate positive responses in both currencies. In contrast to the now rapid decline in the US annual inflation rate, inflation in both Australian and New Zealand will be much slower to peak and reverse. A forecast 1.40% increase over the December quarter in New Zealand will maintain the annual inflation rate at 7.20%. In Australia, a quarterly increase of 1.50% will marginally lift their annual inflation rate from 7.40% to 7.50%.

The FX markets will correctly conclude that there is absolutely no room for either central banks to adjust their current tight monetary policy stance. However, the level of monetary tightening through interest rate hikes is starkly different, with the RBA set to increase their rates by only 0.25% on 7 February, compared to the RBNZ lifting by 0.75% on 22 February.

Higher than forecast inflation results will push up both the AUD and NZD against the USD. The sticky high inflation in Australasia hitting the financial media headlines around the global will also be a timely reminder that both central banks have more to do and therefore the interest rate differentials against the USD will continue to widen. The NZD/USD exchange rate is now set to move into a higher trading range between 0.6400 and 0.6700 due to a weaker USD and NZ interest rates remaining higher for longer.

The sudden and unexpected resignation of Prime Minister Jacinda Ardern last week had no impact on the NZ dollar value, indicating that politicians and political change have no material influence on New Zealand’s economic performance/wellbeing compared to the rest of the world.

*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.