By Stuart Talman, XE currency strategist
A week that delivered numerous volatility inducing events and headlines has ended on a risk positive note as a mixed, but largely stronger US jobs report has propelled US equities higher whilst commodity-linked currencies have outperformed.
The New Zealand dollar advanced for the fourth consecutive day to log a weekly gain of over 1.80%, claiming second position on the G10 leaderboard. The Australian dollar was the standout performer, gaining over 2.00%, buoyed by the RBA’s surprise 25bps hike, a rebound in commodities and broad based improvement in risk sentiment following ongoing stress in the US banking sector.
Logging Friday’s high a few pips shy of 0.6320, the Kiwi reached its highest level in a month and looks poised to stage a topside breakout of the 0.6100 – 0.6300 range that has contained much of the past three months price action.
Friday’s advance lifted NZDUSD back to the 100-day moving average – the widely monitored trend following indicator that has thwarted the Kiwi’s upside intentions on multiple occasions from March onwards.
Daily closes above the 100-day moving average through the first half of this week could signal the commencement of a new, higher range.
US employment numbers were the major talking point from Friday’s overnight session.
Whilst prior readings of jobs growth were revised lower, April’s non-farm payrolls result of 253K new jobs easily exceeded the consensus forecast of 179K. In addition, the unemployment rate fell back to the multi-decade low of 3.4% whilst average hourly earnings surprised (0.5% MoM vs 0.3%) to the upside.
Jay Powell and his colleagues likely focused most of their attention to this last data point.
Upside price pressures continue to simmer…..headline and sub-readings of inflation, whilst well off their peaks, remain uncomfortably high.
The first Fed official to speak following Thursday morning’s 25bps hike, St. Louis Fed president James Bullard welcomed the quarter point hike and added that recession is no longer a base case…..the soft-landing is in play.
Bullard’s most recent comments are a clear step-down from his previous ultra-hawkish views which, at one point, called for a Fed funds target rate north of 6%. Bullard is a non-voter for 2023.
Along with the solid jobs report, Bullard’s comments were the catalyst for Friday’s rebound, equity market bulls re-emerging following a challenging week where risk sentiment was dented by ongoing turbulence in the US banking sector.
A strong earnings report for Apple which beat on both top and bottom-line estimates also boosted risk sentiment.
The Nasdaq climbed 2.25%, the S&P 500 1.85% whilst the Dow added 1.65%, its largest daily decline since early January. Despite these gains, the Dow and S&P 500 ended the week in negative territory whilst the Nasdaq logged a marginal gain.
The New Zealand and Australian dollars are two of the most equity-sensitive currencies, recent underperformance caused by the three major US indices inability to break through critical resistance levels to initiate higher ranges.
This may change, particularly if stress in the US banking sector subsides.
That’s a big if.
In addition, seasonality is not supportive…..May is not a great month for US stocks.
For the week, the Kiwi logged its largest gain against the euro, adding 1.85% as the ECB hike its main policy rate by 25bps, keeping the door open for additional hikes.
Whilst NZDEUR has rebounded over 3% from 2½ year lows in the 0.5530’s over the past fortnight, its too early to declare an end to the euro’s outperformance. Closing the week in the low 0.57’s our key region to monitor this week is 0.5700/25.
Should price action extend through here with ease, NZDEUR likely extends higher towards 0.5824, the mid-point (50% Fib) of the December-April sell-off.
Weekly results against the other majors: NZDGBP +1.26%; NZDJPY +0.75%; NZDCAD +0.50%.
The Kiwi logged a modest weekly loss of -0.15% against its Trans-Tasman peer, finding resistance in the low 0.94’s to end the week near 0.9320.
Price action has formed a double-top near 0.94 over the past few weeks, signalling a move back down into the low 0.90’s. Our key near-term support level to monitor – 0.9270.
Looking to the week ahead the headline event on the global economic calendar – US CPI. Core inflation is expected to tick up for April. Should the MoM reading exceed 0.4%, US stocks and other risk sensitive assets sell-off through the back end of the week.
Following last week’s central bank bonanza, the Bank of England is the sole major bank meeting, widely expected to raise the policy rate by 25bps to 4.50% and like the Fed signal an imminent pause.
Regionally, it’s a busy week for data out of China, including CPI, PPI and trade balance numbers.
RBNZ inflation expectations of Thursday is the sole local data point of note.
SLOOS is the latest acronym to be aware of.
The quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices will be released this week. SLOOS surveys up to 80 large domestic banks and 24 U.S. branches of foreign banks.
According to the Fed: Questions cover changes in the standards and terms of the banks' lending and the state of business and household demand for loans. The survey often includes questions on one or two other topics of current interest.
Following on from last week’s ECB Bank Lending Survey, the SLOOS won’t be pretty reading. The survey is released this evening and has the potential to cause another wave of selling for US financials.
Can the Kiwi log a fifth day of gains, or will the bears drive NZDUSD back below 63 US cents and the 100-day moving average?
SLOOS may provide the answer.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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