By Stuart Talman, XE currency strategist
Whilst it has been a busy 24 hours of economic data releases, a relative calm has descended over the market throughout Tuesday's sessions amidst hopes that diplomatic efforts from the US and other major developed nations will prevent an expansion of the Israel-Hamas conflict.
US President Biden is set to travel to Israel through Wednesday to participate in a four-way summit with Jordan's King Abdullah, Egyptian President Abdel Fattah El-Sisi and Palestinian President Mahmoud Abbas. Meanwhile Israeli forces have bombed parts of Southern Gaza whilst Iran-backed Hezbollah launched offensives against multiple Israeli targets. The Washington Post reports that the US is sending an amphibious task force to be readied aboard warships should the fighting escalate.
Should Iranian and US forces be deployed, we'll likely see risk assets lurch to the downside.
The market's mood through Tuesday's sessions has leaned positive - the three major US equity indexes have recovered early session losses, ascending back into the green in early New York afternoon trade whilst European bourses logged intraday gains. As we go to print, US equities are dipping back into the red.
Net moves amongst G10 currencies have been restrained, as tighter ranges have prevailed for a third day following last Thursday's volatile action in which pro-cyclical currencies were crunched lower. Interestingly, the antipodeans sit at either end of the G10 leaderboard, the Australian dollar climbing over a quarter-of-a-percent on hawkish leaning RBA minutes whilst the New Zealand dollar has fallen over a half-a-percent, underperforming following a softer-than-expected 3Q CPI report.
The notable mover overnight has been the re-acceleration of US bond yields, the US 10-year adding around 10bps to climb back through 4.80% to mark intraday highs through 4.85%. Two weeks back the yield peaked through 4.88% before plunging over 30bps as the Hamas attacks unfolded. Should 4.88% cede, the psychologically important 5.00% mark will likely be tested. In the event the 10-year yield breaks decisively through here, US equities and other risk sensitive assets likely head south.
So, what's catapulted US yields?
A stronger-than expected US retail sales report.
Household spending in September grew at 0.7% (vs 0.3%, expected) following an upwardly revised 0.8% (from 0.6%) in August, indicating that US consumers continue to spend despite higher prices and borrowing costs. Given weekly credit card spending data was down sharply throughout September, the hot number surprised given most people typically spend via their credit cards.
Its yet another key macroeconomic data point that feeds into the US economic exceptionalism narrative, requiring the Fed to hold the target rate at its peak - higher for longer. Whilst additional rate hikes are currently not expected at either the November or December FOMC meetings, the odds of a January hike rose following the retail sales number. Market pricing now assigns a ~60% implied probability the Fed funds target rate is raised to 5.50%-5.75% on 31 January.
In contrast to the hot US retail sales report, the local economic calendar delivered soft CPI numbers for the September quarter, diminishing the odds of an RBNZ hike at the final meeting of the year.
Headline inflation for 3Q printed at an annualised 5.6% (vs 5.9%, expected), down from 6% the prior quarter and well below the RBNZ's forecasted 6%. Encouragingly it was the lowest reading since the third quarter of 2021. However, at 6.3%, non-tradeables (domestic) inflation remains too high as does the annualised core reading at 5.2% (down from 6.1%).
The implications for the RBNZ?
The 3Q CPI report takes pressure off the RBNZ to resume hiking at the 29 November meeting, enabling a wait-and-see approach as more key data points are received through the remainder of the year. Market pricing now assigns a ~30% implied probability of a 25bps hike, down from around 50% prior to the CPI data.
A persistently tight labour market and domestic-driven inflation pressures may require the RBNZ to resume tightening in the new year.
Trading near 0.5930 prior to CPI release, the Kiwi fell circa 30pips within the half-hour that followed. Treading water above 59 US cents through the Asian afternoon and into the London morning, the Kiwi dipped below 0.59 through the second half of European trade. Following the US retail sales data, NZDUSD lurched lower to mark intraday lows a pip or so above 0.5870. Losses have been pared through US trade as US equites have recouped early session losses.
As mentioned at the top of the update, the Australian dollar has fared materially better than the Kiwi, benefitting from surprisingly hawkish RBA meeting minutes. Given the accompanying statement to September's on-hold decision was a near carbon-copy of the prior month's statement, the minutes were not expected to deliver any surprises.
The RBA's language, in some parts, leaned hawkish. In particular the last paragraph:
In reaching their decision, members noted that some further tightening of policy may be required should inflation prove more persistent than expected. The Board has a low tolerance for a slower return of inflation to target than currently expected. Whether or not a further increase in interest rates is required would, therefore, depend on the incoming data and how these alter the economic outlook and the evolving assessment of risks.
The reference to a low tolerance suggests the RBA board remains attentive to upside inflation risks and is ready to resume hiking should hotter than expected CPI and jobs data warrant. The September employment report is released tomorrow.
Market pricing remains heavily in favour of another on-hold decision at the RBA's 07 November meeting.
The mix of soft CPI, hawkish RBA minutes has led to the Kiwi underperforming the Aussie, NZDAUD falling close to 1%. Having peaked through 0.94 early last week, the antipodean cross fell through 0.9250 through Tuesday's sessions. The 0.9400/50 resistance zone offers stout resistance, unlikely to be breached in the short to medium term.
Looking to the day ahead the focus will be on China activity data, UK CPI, a multitude of central bank speakers and developments in Israel and Gaza.
With the US 10-year yield resuming its march towards 5.00%, the dollar is likely to remain supported, NZDUSD extending further below 59 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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