By Stuart Talman, XE currency strategist
Simmering geopolitical tensions and a negative response to Google parent, Alphabet's earnings report has engendered risk-off flows through overnight trade, the S&P500 again testing a critical support level at 4200 whilst longer dated US bonds resume their march higher following a two-day pullback.
Net moves amongst the G10 cohort were relatively benign for most of the past 24 hours with volatility spiking through the second half of US trade. The Australian dollar occupies the bottom spot on the leaderboard, shedding around two-thirds-of-a-percent despite a stronger-than-expected quarterly CPI report ratcheting up expectations for a resumption of the RBA tightening cycle.
The New Zealand dollar also declines over half-a-percent, price action once again testing resistance located in the 0.5870's, but again failing to break through for the third time during the past four trading days.
NZD sellers emerged through the Asian afternoon, inducing the U-turn from 0.5870 before NZDUSD was offered more aggressively through the first half of European trade, falling decisively through 0.5820. Chopping around in the couple of hours prior to the open of US equity markets, the Kiwi has lurched lower through the New York morning, marking intraday lows through 0.5810.
Failure to break through the 23.6% Fibonacci retracement of the October sell-off, which closely aligns with 0.5870 resistance, suggests that fresh-year-to-date lows are imminent as the October downswing extends lower.
Intensifying geopolitical risks create a strong headwind for pro-cyclical currencies, including the New Zealand dollar.
Wednesday's news flow portends an escalation of the Israel-Hamas conflict.
Whilst Israeli forces continue to stall an inevitable ground offensive, the reasoning not rooted in diplomacy. Rather the request has come from the Pentagon to enable US forces to deploy missile defence systems. The reasoning: a ground incursion will provoke missile attacks on US forces stationed around the region.
In addition, the Wall Street Journal has reported that Hamas fighters engaged in training in Iran prior to the 7 October attacks. This article in addition to an earlier piece (from the same journalist) that detailed Iran's involvement in plotting the initial attack, increases the likelihood of Iran/US escalation.
Despite the headlines, US bond yields are notably firmer, the yield on the benchmark 10-year note adding over a dozen basis points, climbing back through 4.95%. Another attempt at breaking through the psychologically important 5.00% mark is likely to occur before the end of the week.
Throw in the Nasdaq that is getting absolutely slammed (losses exceeding 2.50% at session lows), there is nowhere to hide for market participants. Both the S&P500 and Nasdaq are breaking below critical support levels, looking increasingly vulnerable to a significant deleveraging episode.
Whilst Alphabet beat on both earnings per share and topline revenue, the internals of the report spooked investors, specifically a smaller-than-expected profit from its cloud computing division. As Google's traditional search engine business matures, other units, such as cloud computing are critical in delivering sustained growth.
Crunched close to 10%, it was the largest intraday decline since March 2020 - the depths of pandemic fear and panic.
Alphabet aside, Microsoft also reported after Tuesday's closing bell, easily beating key metrics. At Wednesday's session highs, the stock was up around 5%.
If megacap tech stocks, at aggregate, fail to fire following 3Q earnings, don’t expect to see the seasonal year-end rally for stocks.
In turn, risk sensitive currencies, including the New Zealand and Australian dollars will remain under selling pressure as the year concludes.
In other news from Wednesday, a hot CPI report across the Tasman has ratcheted up expectations for new RBA Governor Michelle Bullock to deliver her first rate hike at the Melbourne Cup meeting on 07 November.
Whilst the RBA's preferred inflation gauge, the trimmed mean (which trims away a certain % of the distribution at both tails) fell from 5.9% in the June quarter to 5.2%, the result was above both the consensus (5%) and the RBA's forecast (4.8%).
The RBA has held the cash rate steady from June at 4.10%, but now looks set to resume tightening given the minutes of the September meeting recorded that the Board has a low tolerance for a slower return of inflation to target than currently expected.
Futures markets now assign a greater than 60% chance of a November hike, up from around 20% earlier in the week.
The immediate reaction: NZDAUD plunged from near 0.92 to mark intraday lows through 0.9260. However, the kneejerk reaction has been unwound through the offshore sessions, the antipodean cross rebound back through 0.92.
For now, a major support zone at 0.9150/70 remains intact.
Looking to the day ahead, the Meta earnings report drops after the US equity market close whilst Fed Chair Powell is speaking in an hour or so. RBA Governor Bullock is also speaking through the day.
The headline event on the economic calendar is the ECB's interest rate decision, expected to pause after 10 consecutive hikes, holding the deposit rate at 4.00%. Durable goods orders, the updated reading on 3Q GDP and initial jobless claims will be the focus during US trade.
Of course, developments in the middle east and the bond market will continue to the be the two primary influences on short term direction.
Yesterday we commented that price action would need to move decisively above 0.5870 resistance to consider a basing call. This level proved too high a hurdle; the NZD bears retain control.
Fresh year-to-date lows have been logged as we go to print……the Kiwi will trade sub-58 US cents for the first time in 11 months with further downside expected through Thursday's sessions.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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