Rising US treasury yields last week's major story, DXY gaining momentum. Reserve Bank of Australia meeting: presents as a low volatility event

By Stuart Talman, XE currency strategist

Following an eventful week of central meetings and tier 1 macroeconomic data releases, market participants can be excused for scratching their heads regarding the performance of the US dollar.

The Fed's latest summary of economic projections maintained a projected 3 x 25 bps cuts for 2024, whilst Powell's FOMC presser was unequivocally dovish, sending a clear message - the Fed will be cutting as inflation tracks lower even if the resiliency in activity data remains.

This provided the greenlight for US stocks to lead global equity markets higher as the fear that the latest edition of dot plots would project only 2 cuts before year-end, evaporated. The S&P500 and Dow logged their best weeks for the year, rising +2.29% and +1.97%, respectively whilst the Nasdaq's +2.85% gain was the tech index's third largest week-on-week gain.

Risk sensitive currencies, including the New Zealand and Australian dollars initially benefitted from the Fed's dovish hold, but ultimately reversed course as the US dollar logged its second strongest week for the year, the dollar index (DXY) gaining just shy of one percent.

So, despite the three major US equity markets ripping to fresh all-time highs and the yield on the benchmark 10-year note shedding circa 15bps from Monday's peak, the dollar clearly reasserted its ascendancy, DXY ending the week near 104.50, setting up to test year-to-date and 4-month highs a few pips below 105.00.

Perhaps the dollar benefitted from the view that despite the Fed's willingness to commence its easing cycle, other major central banks may move faster to reduce their policy rates.

Last week the Swiss National Bank became the first amongst the major central banks to cut rates, delivering a non-consensus cut, lowering its main policy rate from 1.75% to 1.50%.

During Friday's sessions, ECB officials, including President Lagarde delivered dovish remarks, raising expectations for a June ECB cut.

Layer in solid macroeconomic dataflow for the world's largest economy which continues to represent resilient activity levels, dollar bulls appear willing to extend the 2%+ DXY rebound from the 08 March swing low below 102.50.

It proved to be a tough week for the embattled New Zealand dollar, the -1.43% week-on-week decline driving NZD/USD below critical 0.6050 support before 60 US cents was breached for the first time since November.

Having peaked through 61 US cents the day after the FOMC meeting, the Kiwi shed circa 120 pips over the final two trading days of the week. Selling momentum quickened through the early Asian afternoon, Friday, as notable CNY weakness saw USD/CNY breach the 7.20 barrier that had capped the pair’s upside over the past four months.

Should the Chinese authorities tolerate further CNY downside this week, expect NZD/USD to extend further below 0.60 having ended last week in the 0.5980's.

Aside from the Japanese yen, the New Zealand dollar lost ground against all its major peers, NZD/CAD falling -0.97%, NZD/AUD -0.70%, NZD/EUR -0.68% and NZD/GBP -0.31%.....a rough week.

Despite the Bank of Japan delivering its fist rate hike in 17 years in addition to abandoning its yield-curve-control policy, the extremely well telegraphed policy shift failed to boost the yen, NZD/JPY logging a modest weekly again, just shy of two-tenths.

Topping out above 92.00 through Thursday’s sessions, NZD/JPY ended the week in the 90.70’s, setting up to again probe a 90.40/70 support zone that has provided a floor to the pair over the past couple of weeks.

Looking to the week ahead, it’s a subdued economic calendar due to the Easter shortened week. Regionally, the focus will be on CPI reads out of Australia (monthly indicator) and Tokyo, the latter more widely monitored than the nation’s reading given it precedes by a few weeks, setting the outcome for the national numbers.

The latest reads on 4Q GDP drop for the UK and the US whilst on Friday, the headline event, core personal consumption expenditures is released. The Fed’s preferred inflation gauge is expected to print at 0.3% MoM, sustaining an annualised rate of 2.8%. An upside beat would not surprise given the stronger-than-expected CPI and PPI data, earlier in the month.

Having broken below the prevailing 8-week range, we expect further downside for the Kiwi. The 618% Fibonacci retracement of the October to December upswing is located at 0.6001, therefore breached via Friday’s sell-off.

The 78.6% Fib level resides at 0.5901…….do we see a test this week?

Perhaps after Easter given next week presents March jobs numbers for the US.

Stuart Talman is Director of Sales at XE. You can contact him here.