Fed Chair Powell's speech induces see-sawing price action. Ultimately bond yields continue ascent & stocks look increasingly vulnerable. Soft Aussie jobs report does little to shift outlook for RBA

By Stuart Talman, XE currency strategist

Risk off flows continued to dominate financial markets across the globe through Thursday as geopolitical headlines, rising bond yields and a speech from Fed Chair Jerome Powell induced market participants to continue to sell risk-sensitive assets.

Whilst some major currencies managed to claw back some ground against the dominant US dollar, the antipodeans continue to underperform, in particular the New Zealand dollar, further extending the current downswing to mark fresh year-to-date lows a few pips through 0.5820.

In a busy day of central bank speakers (7x Fed governors), Jerome Powell's speech and Q&A session at the Economic Club of New York has created lively price action through the New York lunch hours. 

In prepared remarks, Powell concluded his speech by stating:

Given the uncertainties and risks, and how far we have come, the Committee is proceeding carefully. We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.

The immediate reaction: risk-on flows, bond yields and the dollar pulling back whilst US equities and pro-cyclical currencies bounced off session lows. Prior to the commencement of Powell's speech, NZDUSD had pared losses, improving from below 0.5820, through 0.5840 before spiking to within a few pips of 5870 as Powell concluded his prepared speech.

Volatility stepped up through the Q&A session, see-sawing price action ensuing as Powell pivoted back-and-forth from hawkish to dovish comments.

On the hawkish side, Powell commented that inflation remains at too high levels; the economy is performing very well; it's possible a more inflationary period is ahead; and it doesn’t feel that policy is too tight.

Whilst dovish language was used via references to higher bond yields tightening financial conditions; at the margin, higher yields could reduce the need for the Fed to tighten; there are signs the labour market is getting back into balance; and the labour market is gradually cooling.

At the conclusion of Powell's appearance, the yield on the US 10-year eased back below 4.95% having swung around between 4.89% and 4.99% during the speech/Q&A whilst the S&P500 is up around half-a-percent having been down over half-a-percent following Powell's more hawkish commentary. Later in the session, these moves have been reversed, the 10-yr yield back near intraday highs whilst the S&P500, Nasdaq and Dow fall between 0.5% and 1%.

Climbing back into positive territory following a ~50pip rebound from the fresh year-to-date low (0.5816), intraday NZDUSD price action has formed a hammer candlestick/bar which can be interpreted as a bullish reversal pattern, signalling the pair is nearing the bottom of its downtrend.

Characterised by a short body and longer, lower shadow, meaning price action has materially rebounded off intraday lows to (theoretically) close higher, follow through buying over the next few trading days is required to validate the reversal pattern.

We'd like to see NZDUSD ascend decisively through a 0.5900/30 resistance zone to back the bullish reversal call, before further upside results in 60 US cents forming new support.  

Keeping the focus on Powell's comments, specifically regarding the labour market, one could argue that despite some signs of cooling, conditions remain far too tight to enable inflation to return to the Fed's 2% target.

Following on from the substantial nonfarm payrolls beat earlier in the month, weekly initial jobless claims have extended their stronger-than-expected (lower claims) run into a 10th week. Printing at 198K (vs 212K, expected), this week's result was the first time the data point had fallen below 200K since January. Despite 525 bps of Fed tightening, the labour market remains robust, indicative of a US economy that is yet to tip over under the weight of the most aggressive monetary tightening cycle in over 40 years.

Should inflation fail to recede from current levels (core PCE currently at 3.9%) whilst key labour market metrics remain strong (unemployment currently at 3.8%), the Fed will be forced to recommence hiking in early 2024.

In other news from Thursday and maintaining the jobs market narrative, a soft employment report across the Tasman has done little to shift expectations regarding the near-term path for RBA monetary policy.

Headline jobs growth was softer than expected at 6.7K (vs 20K, expected) whilst hours worked and full-time jobs notably declined. The unemployment rate at 3.6% fell to a three-month low, however the decline can be explained via a fall in the participation rate rather than robust jobs growth.

Futures markets currently assign a circa 23% implied probability the RBA lifts the cash rate to 4.35% at its 07 November meeting. Whilst the base case is clearly calling for an on-hold decision, following the release of the surprisingly hawkish minutes earlier in the week, odds of a 25bps hike have climbed from around 5%.

Next week's quarterly CPI report looms as the key input in determining the outcome of the RBA's decision.

The Kiwi added circa 30pips against the Aussie in the few hours that followed the data release, NZDAUD climbing from 0.9230 to 0.9260. However, gains were fleeting, the pair extending further to the downside, marking intraday lows a few pips above 0.9220, touching the 100-day moving average.

From its 09 October swing high a pip or so above 0.9410, NZDAUD has fallen circa 2% and looks vulnerable to further downside given the RBA now presents as the more hawkish of the two antipodean central banks.

Should the pair move decisively below the widely monitored 100-day MA, key support in the 0.9150's will likely be tested.

Given the Australian economy is on a stronger footing than New Zealand's, we expect the pair to test sub-0.90 levels, perhaps before the year is done.

Casting our eye over the day ahead, the calendar delivers local trade balance data, UK retail sales and another busy day of central bank speakers.

As we go to print, sentiment has pivoted back to negative late in US trade, the three major US indices in the red whilst the Kiwi has shed ~20pips from overnight highs.

A weekly close in the high 0.58's would provide further evidence that NZDUSD is attempting to base, whilst a close in the low 0.58's maintains the downside momentum.

Stuart Talman is Director of Sales at XE. You can contact him here.