By Stuart Talman, XE currency strategist
Ahead of the first FOMC meeting for the year, more spirited price action has the been the state of play through Wednesday's sessions. Amongst the notable intraday changes, the yield on the benchmark US ten-year note is tracking towards a third consecutive down day, falling back below 4.00%, in turn weakening the dollar - lower against most of its major peers.
Treading water above 61 US cents through local trade and into the European morning, the New Zealand dollar was propelled higher following the release of softer-than-expected ADP Employment change and employment cost index (ECI) data, the latter rising at the slowest pace in 2½ years. Moderating wage inflation in addition to further consumer price disinflation provides the Fed with room to commence cutting the Fed funds target rate in the months ahead.
Following the release of the data, rates markets shifted back to pricing in close to 150 bps of monetary, up from around 130 bps earlier in the week. Fed funds futures assign a ~40% implied probability the Fed commences cutting at the 20 March FOMC meeting.
Earlier in the week, we flagged 0.6150 as a key upside hurdle for the New Zealand dollar to clear in order to break out of the prevailing 10-day range, shifting the short-term bias from negative to neutral.
Trading around 0.6120 before the release of the ADP/ECI, NZDUSD was catapulted over 50 pips higher to mark Wednesday's intrada highs in the 0.6170's. Around half of this move has been pared as the market awaits Fed Chair Powell's FOMC press conference (0830), the Kiwi revesting back to trade near 0.6140.
We're therefore yet to witness a sustained break above 0.6150 and trendline resistance formed via the 28 December, 12 January and Wednesday's highs.
Given market participants expect Powell to push back against aggressive pricing of 2024 cuts, the bar has been set high for the Fed chair to deliver a hawkish surprise. Powell will likely pour water on a March cut, citing inflation that remains above target, a still tight labour market and the recent run of stronger-than-expected macroeconomic data.
We suspect the Fed will emphasise that patience is required when it comes to commencing the easing cycle given history informs a second inflation wave emerges if central banks are too eager to cut.
In addition to the noted descent for US treasury yields, the S&P 500 and Nasdaq are also under pressure, the latter falling over 1.5% at session lows marked during the first hour of trade.
Despite Microsoft delivering beats for profit and revenue, investors have driven the stock price lower - a sign that loft valuations have provided little room for expensive megacap tech stocks to continue their ascent. Also surpassing profit and revenue estimates, Google parent Alphabet fell over 5%, punished for underwhelming advertising revenue.
The three major US equity markets look primed for a correction having advanced into technical overbought territory following a strong start to the year.
A pronounced pullback would likely induce underperformance for equity market correlated currencies such as the New Zealand and Australian dollars.
In other news from Wednesday, the Kiwi has advanced back through 0.9300 against the Aussie, NZDAUD climbing from 0.9290 into the 0.9320's following the release of weaker-than-expected fourth quarter CPI for the Australian economy.
Headline inflation across the Tasman dropped from 5.4% in the September quarter to 4.1% (vs 4.3%, expected), whilst the RBA's preferred measure, the trimmed mean fell from 5.1% to 4.2% (vs 4.3%, expected). The less comprehensive monthly CPI indicator eased from 4.3% to 3.4% (vs 3.7%, expected).
It is encouraging news for the RBA - the 4.1% headline result printing below the RBA's forecasted figure of 4.5%. Should further disinflationary progress materialise through the first quarter, the RBA may pivot to commence cutting the cash rate early in 2H.
Looking to the day ahead, the Fed's interest rate decision, accommodating statement and Powell's presser are the week's headline events.
A mega-Thursday also delivers eurozone CPI and the Bank of England's interest rate decision - also universally expected to maintain the policy rate at its peak.
Will a hawkish Powell drive the dollar higher, pushing the Kiwi back below 61 US cents, or will the market dismiss any talk that the Fed funds target rate won’t be cut before the northern hemisphere summer, sending yields and the dollar lower?
We lean towards the latter.
Stuart Talman is Director of Sales at XE. You can contact him here.
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