By Stuart Talman, XE currency strategist
Subdued trading action has been the state of play for markets through Thursday's sessions, price action contained within relatively condensed ranges following risk-off flows earlier in the week.
The yield on the benchmark 10-year note continues to favour a higher path, logging modest gains to trade through 4.15%, lifted by stronger than expected jobless claims. At 187K (vs 207K, expected), the weekly data point fell to its lowest level since September 2022, underscoring persistently tight labour market conditions.
The dollar is mixed against its major peers with most of the majors’ intraday change contained within a +/- 0.25% range, the Swiss franc being the noted laggard, shedding close to half-a-percent.
Logging a marginal intraday loss, the New Zealand dollar has mostly ranged between 0.6100 and 0.6130, yet to deliver any basing signals following three days of pronounced selling. The Kiwi trades circa 3% below last Friday's apex with selling momentum slowing near 0.6090 where the 200-day moving average is located.
Macroeconomic data (UK CPI, US retail sales) surprising to the upside and central bank speak have been the two catalysts for risk-off flows over the first three days of the week, officials at the Fed and ECB commenting that it is still far too premature to be considering rate cuts and that when these commence, the pace of monetary easing is likely to be measured - there will be no rush.
In prepared remarks, Atlanta Fed President Raphael Bostic warned against prematurely cutting the target rate and that more evidence was required to confirm that inflation remains on track to fall to the Fed's 2% target within the Fed's projected time frame.
Unlike the market, Bostic expects the initial rate cut to occur later in the year, commenting:
My outlook right now is for our first cut to be sometime in the third quarter this year, and we’ll just have to see how the data progress.
To start the year, the market assigned a near 80% implied probability Jerome Powell and his FOMC colleagues would favour a 25 bps cut at the 20 March FOMC meeting. Now, the odds have flipped back in favour of an on-hold decision, pricing a ~55%/45% split.
February 13 looms as a key date, the release of CPI for January likely the final input that determines the path for Fed policy up to the 01 May FOMC meeting.
In other news from Thursday, ECB minutes were released. Governing council members acknowledged encouraging disinflationary forces but also commented that persistently sticky services inflation poses a challenge to the last mile – the final push to return inflation to targeted levels.
The sole reference to rate cuts was framed in the context of market expectations, which similar to expectations for the timing of the first Fed cut, are overhasty.
Its clear from both the minutes and the deluge of ECB officials speaking over the past fortnight that the ECB will not be cutting its policy rates until June/July at the earliest.
Having peaked a pip or so through 0.5750 in late December, NZDEUR has shed almost 2.5%. Marking lows a few pips above 0.5610 through both Wednesday and Thursday, the pair seeks to fund support at the 200-day moving average.
Failure to do so and a break below 0.5611, the mid-point of the November to December upswing, could open a path for NZDEUR to re-test major support near 0.5480.
Aussie jobs numbers were also released through Thursday – the unemployment rate remaining steady at 3.9% whilst employment growth plummeted, -65.1K through December, missing the consensus forecast of 17.6K new jobs created. The Australian Bureau of Statistics employment report is notoriously volatile, due either to seasonal adjustments/factors and/or sample rotation.
Looking through the monthly volatility, there are signs of softening however the labour market remains at historically tight levels given record participation and an unemployment rate remaining below 4%.
Despite headline jobs growth miss, the Kiwi underperformed against the Aussie through the Asian afternoon and offshore trade, falling from a few pips below 0.9350 to briefly dip below 0.9300.
Range bound trade has been the state of play for the antipodean cross for the past 6 months, finding support around 0.9150 on the downside whilst unable to sustain prolonged price action north of 0.9350.
Relative economic fundamentals, namely Australia’s more favourable current account in addition to the RBA presenting as the more hawkish central bank, suggest a downside range breakout is the likely next key directional move.
Shifting our attention to the final trading day of the week, it may be a quiet end to the week given the lack of market moving events – UK retail sales and Michigan Consumer sentiment the tier 1 releases.
The Kiwi likely trades a 30 – 50pip range, remaining in proximity to 61 US cents.
Stuart Talman is Director of Sales at XE. You can contact him here.
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