By Stuart Talman, XE currency strategist
Jerome Powell reluctant to commit to additional near-term rate hikes, a lower-than-expected quarterly refunding announcement, soft US data (ISM Manufacturing, ADP Employment) - developments over the past day-and-a-half that have induced a boost in risk sentiment. Notably, longer dater US treasury yields are sharply lower, in turn weighing on the dollar.
The three major US equity markets climb for a fourth consecutive day, the S&P500 advancing close to 5% from Friday's lows, intraday gains approaching 2%.
The critical directional move for the market over the past 9 trading days has been the pullback in yields. Falling through 4.62% at Thursday's intraday lows, the yield on the benchmark US 10-year note has fallen circa 30bps from Wednesday's highs.
It would be ill informed to call an end to the dollar's dominance, rather labelling it a pause given dollar tailwinds (higher for longer, economic outperformance) are still prevalent.
Gaining around two-thirds-of-a-percent, the New Zealand dollar claims second spot on the G10 leaderboard, advancing from below 0.5850 to mark Thursday's highs a few pips shy of 0.5920. Heading into the second half of US trade, gains have been pared as US bond yields bounce off session lows, NZDUSD shedding ~20pips, set to open Friday's local session in the 0.5890's.
The two-day rally has lifted the Kiwi from sub-0.58 levels through the 0.5840/80 resistance zone that had thwarted the pair's upside on multiple occasions throughout the back end of October.
Price action suggests the New Zealand dollar is attempting to base having marked the year-to-date low a few pips north of 0.5770 on 26 October.
The mid-point of the 11 October to 26 October downswing is located at 0.5914. A decisive move beyond here as previous resistance around 0.5880 forms new support adds further weight to the basing call.
Conversely, if NZDUSD loses topside momentum in the sessions ahead, NZD sellers will sustain the downside bias.
Key event risk looms via this evening’s US jobs report, consensus forecasts calling for 172K new jobs and the unemployment rate to remain steady at 3.8%. Last month the US economy added 336K new jobs. Should October deliver another hot read, expect an unwinding of the past 48hours directional moves - bond yields will U-turn higher, the dollar will bounce, US equities head south.
Risk sensitive currencies, including the New Zealand and Australian dollars will likely reverse most of this week's gains.
A softer than expected jobs report would further embolden the risk bulls as the market continues to buy into the view that the Fed is done hiking, a 5.25%-5.50% Fed funds target rate will remain as this cycle's peak.
In this scenario, the likely path for the Kiwi - extending further beyond 59 US cents.
Shifting the focus back to overnight action, specifically the British pound - as widely expected the Bank of England delivered an on-hold decision. The key takeaways:
- BoE maintains bank rate at 5.25%
- MPC voted 6-3 in favour of a second consecutive hold
- Flagged policy to remain restrictive for some time
The messaging from the BoE is similar to the Fed and other major central banks: inflation remains stubbornly high, further tightening may be required, the policy rate will be held in restrictive territory for an extended period.
No surprises from the BoE.
Market reaction was muted, the pound already strengthening against the dollar due to the developments mentioned at the top of the update. The Kiwi spiked through 0.4820 resistance, NZDGBP marking intraday highs a few pips shy of 0.4850.
Following 8 days of range bound trade between 0.4770 and 0.4820, the topside breakout lifts the pair above the 100-day moving average, signalling downside exhaustion following a greater than 3% retreat from the October swing high.
We look for a 0.4750 to 0.4900 range to evolve over the final two months of the year.
Weekly jobless claims were also released overnight, initial jobless claims printing at 217K (vs 210K), rising to the highest level in 7 weeks, tentatively signalling mild labour market softness.
Looking to the day ahead, aside from the US jobs report, potential volatility inducing events present via the Caixin Services PMI and the ISM Services PMI. Service sector activity in the US is expected to remain firmly in expansionary territory but easing for a second month from 53.6 to a consensus 53.0.
It should prove to be a lively end to an eventful week.
Will the Kiwi extend higher for a third day, or will the dollar reassert its dominance on a potentially strong jobs report?
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Stuart Talman is Director of Sales at XE. You can contact him here.
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