By Stuart Talman, XE currency strategist
The expectation heading into last week was for directionless, relatively subdued price action given the lack of market moving events in the US and that's what we got in the currency space, the US dollar (index - DXY) firming just shy of two-tenths of a percent, whilst the New Zealand dollar shed around a third-of-a-percent, failing to maintain a foothold above 61 US cents to end the week near 0.6090.
For the week, the Kiwi was contained in a ~90pip range.
Expectations for this week shift from the muted end of the scale to the boisterous - a packed economic calendar which includes the first FOMC meeting for the year and US jobs numbers, should induce a significant step-up in volatility, potentially setting the tone for the market for the remainder of the first quarter.
The Fed will deliver a universally expected no-change decision this week, maintaining a 5.25 - 5.50% target rate, however the FOMC meeting has the potential to send shockwaves through the market should Jerome Powell and his colleagues push back against overzealous market pricing.
Following the release of the Fed's preferred inflation measure: monthly core personal consumption expenditure data during Friday's US session, (which printed in-line at 0.2%, MoM) rates markets continued to assign a near 50/50 implied probability of a 20 March cut and over 130 bps of cumulative easing through 2024, equating to 5 or 6 quarter point cuts.
The market's expectations for Fed policy reached an extreme early in the month, Fed funds futures pricing implying a 25-bps cut at each of the seven remaining meetings, commencing on 20 March.
Fed officials have done their best to pour water on the markets projected easing path in recent weeks, reminding that it is far too premature to consider lowering the target rate, implying cuts are likely commence in 2H. In addition, recent macroeconomic data flow has surprised to the upside, last week's 4Q GDP print one of several data points that record a US economy that continues to defy expectations.
The market dialling back its projections for the speed and magnitude of Fed easing for the year ahead has the been the primary driver for the dollar's rebound, through January, the dollar index climbing over 2% during this span.
Year-to-date, the New Zealand dollar is down over -3.5%, lagging all of its major peers bar the Swedish krona (-3.73%) and the Japanese yen (-5.03%). The Australian dollar logs a similar decline, falling -3.44%.
At the December FOMC meeting, the Fed released its latest summary of economic projections and accompanying dot-plots. The median dot-plot amongst Fed governors projecting 3 cuts for 2024, or circa 75 bps of accumulative easing…..therefore, the market currently expects an extra 2 or 3 cuts.
Should market pricing continue to more closely align with the Fed's projected path, US bond yields will continue to firm, as will the dollar, pushing the Kiwi nearer to 60 US cents.
Aside from a potentially more hawkish tone from Fed Chair Powell this week, US yields could benefit from another tailwind this week - the US treasury department's quarterly refunding announcement (aka the TFA).
Monday will confirm the overall funding totals whilst Wednesday informs of the maturity breakdown.
A routine announcement that used to pass without any hullabaloo, given the historically elevate levels of US government debt, the TFA now draws significantly more interest from the market.
In 3Q and early 4Q, a supply-demand mismatch required to treasury to issue longer dated bonds at a higher yield in order to achieve the required funding levels, thereby driving up yields at the long end of the curve, inducing a notable tightening in financial conditions.
You will recall the Kiwi fell to a year-to-date low near 0.5770 during this period.
The TFA, therefore has the potential to boost US treasury yields, driving the dollar higher.
A stacked global calendar also delivers the first Bank of England meeting for the year, CPI for Australia and the eurozone, PMIs for China and the ISM Manufacturing PMI in the US and eurozone GDP.
On Friday, the US jobs report is expected to report 173K new jobs were created in January, the unemployment rate remained steady at 4.1% and average hourly earnings ticked down from 0.4% month-on-month to 0.3%.
It’s a huge week for US earnings reports with five of the magnificent seven reporting: Alphabet (Google), Microsoft (both TUES.), Apple & Amazon (both THUR.) and Meta Platforms (FRI.).
Last week's price action was bearish for the New Zealand dollar, NZDUSD swiftly rejecting levels around 0.6150 and failing in its attempts to settle above 0.6100. The one positive takeaway for NZD bulls, the pair closed the week above the 200-day moving average, albeit marginally.
We suspect further downside may evolve through the week as the Fed reminds the market it is in no hurry to commence cutting the target rate. Currently located in the 06040's the 100-day moving average presents as an obvious downside target for the Kiwi to test.
Stuart Talman is Director of Sales at XE. You can contact him here.
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