By Stuart Talman, XE currency strategist
It's been a cautious start to a huge week as the market awaits numerous volatility inducing events in the US which includes the first FOMC meeting for the year, the treasury department's quarterly funding announcement (TFA), megacap tech earnings and US jobs numbers for January.
The three major US equity markets eased off record highs during Friday's session, ending a six-day winning streak for the S&P500 which is up over two-and-a-half percent to start the year. Tech stocks continue last year's dynamic of leading the broader market higher, the Nasdaq advancing close to 4% through January.
The Fed and the US treasury department could send US stock lower should the former choose to pour water on market expectations for a half dozen rate cuts, whilst a TFA heavy on longer dated issuance would propel treasury yields higher.
Throw in a hypothetical strong labour market report with non-farm payrolls 200K+ (173K new jobs, expected), this is the recipe for US equities to reverse course as market participants dial back expectations for the magnitude of monetary easing through 2024.
In this scenario, risk sensitive currencies, including the New Zealand and Australian dollars would continue to track lower against a backdrop of deteriorating risk sentiment.
Of course, don’t discount the alternative path.
Jerome Powell maintains his messaging from the December FOMC - rate cuts are coming, a market friendly TFA is handed down and US jobs growth is modestly lower than the consensus forecast…..catapulting the S&P500, Nasdaq and Dow to fresh record highs.
Commencing the new week a few pips below 61 US cents, the New Zealand dollar opened stronger relative to Friday's close and advanced in early afternoon trade before chopping around near 0.61. Catching another bid in the London morning, NZDUSD climbed a couple of pips through 0.6120 at intraday highs to be one of the better performers amongst the G10.
Although, as has been the recent trend, the majors have traded within relatively condensed intraday ranges.
Range trading has been the state of play in currency markets over the past two weeks, the US dollar consolidating January's gains as overzealous market pricing pulled back from pricing in 7 x 25 bps interest rate cuts from the Fed.
Should the market continue to pare expectations for the magnitude of monetary easing for 2024, more closely aligning with the Fed's projections of 3 quarter point cuts, the US dollar will continue to recoup 4Q's losses, in turn driving the Kiwi lower, setting up a potential test of 60 US cents.
Key NZDUSD levels/regions that we’re monitoring this week: on the downside 0.6060/90 whilst on the topside, 0.6150.
Last week's swing low was marked a couple of pips above 0.6060 whilst the mid-point of the October to December upswing is located at 0.6071. On multiple occasions over the past two weeks, intraday lows have traded within close proximity to 0.6090.
A break below this region would be a notable bearish technical development, likely guiding a path for the Kiwi to test the 100-day moving average, located near 0.6040 and below here, the 61.8% Fibonacci retracement at 0.6001.
Conversely, price action advancing north of 0.6150 shifts the short to medium term bias from negative to neutral. Via the 17 January and 25 January intraday highs, 0.6150 presents as a double top. Clear here - the next major upside resistance zone presents at 0.6250/80. Reclimbing territory north of the early January swing highs shifts control back in favour of NZD bulls.
Looking to the day ahead, tier 1 data presents via retail sales across the Tasman and a preliminary read on 4Q eurozone GDP. Economic activity in the European Union is projected to have contracted by -0.1% in the December quarter yielding a flat annualised rate of growth.
A downside miss will ramp up bets for the ECB to commence cutting before the northern hemisphere summer, weakening the euro.
In the US, the JOLTS jobs openings release kicks off a busy week of labour market metrics.
Ranges remain tight, the trend directionless…..can the Kiwi extend further above 61 US cents or will it continue to oscillate in anticipation of this week's pivotal events?
Stuart Talman is Director of Sales at XE. You can contact him here.
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