By Stuart Talman, XE currency strategist
Following last week’s upside blowout, risk assets have consolidated their mammoth gains.
Having spent much of the session trading negative, US equities have bounced modestly into positive territory through the New York afternoon ensuring the New Zealand and Australian dollars maintain price action near Friday’s peak.
The velocity of last week’s ascent was astonishing......we’re likely to witness calmer, more orderly price action this week, particularly given the light US economic calendar.
It’s a busy week for central bank officials – 14 scheduled Fed speakers, 14 scheduled ECB speakers. Around a half-dozen BoE officials also speaking.
Predictably the message from the Fed in the wake of last week’s encouragingly softer CPI has been – don’t get too carried away.
Fed officials will not have celebrated the recent eye-watering rally.....an easing in financial conditions does not assist the inflation fight.
Speaking at a UBS event in Sydney, Fed Governor Waller (a voting member) commented:
“These rates are going to stay.....keep going up....and they’re going to stay high for a while until we see this inflation get down closer to our target....... we’ve still got a ways to go. This isn’t ending in the next meeting or two.”
The message was clear from Fed Chair Powell following the fourth consecutive 75bps hike on November 2nd – the pace of hikes will slow, BUT, there was still much work to be done – more hikes and rates held at the peak of the cycle “for some time.”
Terminal rate pricing pushed through 5% immediately following the hike to the target range of 3.75% - 4.00%, but subsequently eased back below in the wake of last Wednesday’s downside CPI surprise.
When asked if the policy rate could rise above 5%, Waller commented that this depended of upcoming inflation data.....
“7.7% CPI inflation is enormous,” he said. “It’s really not so much about the pace any more, it’s where we’re going to end up. And where we end is going to be driven solely by what happens with inflation.”
One factor that could put an unwanted floor under inflation is China’s re-opening.
Over the past couple of weeks, Chinese officials have confirmed the forming of committee to assess the best path towards re-opening the economy early next year.
In addition, whilst still committed to covid-zero, there has been some loosening of ultra-restrictive policy settings.
Its good news for the global economy and China-sensitive assets including the Kiwi and Aussie dollars, however its likely an inflationary development.
China’s demand for energy has been suppressed throughout much of 2022 as factories operate significantly below capacity, household spending is suppressed and people forgo travel.
As the Chinese economy roars back to pre-Covid levels, energy demand will spike, pushing crude oil back up through US$100/barrel, delivering an upside surge in prices.
In this scenario, the Fed and other central banks would be forced to prolong monetary policy tightening, resulting in higher terminal rates relative to current market expectations.
This is a potential story line for 2023.
Shifting back to the present, the Kiwi commenced the new week just below 61 US cents, ranging between 0.6060 and 0.6120 through Monday’s sessions.
Having broken through the mid-point of the August-October downswing, NZDUSD now trades around the 61.8% Fibonacci retracement, located a couple of pips above 0.61.
Should price action extend higher to consolidate above here, the Kiwi likely tests its 200 day moving average (located in the 0.6230’s) in the short to medium term.
One of the most widely followed trend following technical indicators, the 200d MA is used to influence trading decisions. NZDUSD last traded above its 200d MA back in March, albeit for a relatively short period of a few weeks.
You have to venture back to the Covid rebound period of June to ’20 to June ’21 for the last period of sustained price action above the 200d MA.
Whilst risk assets have been enjoying a ferocious bounce, it’s far from rainbows and unicorns – many headwinds remain as most developed nations’ economies head into recession.
We therefore expect the New Zealand dollar’s current upside surge to lose momentum in close proximity to the 200d MA.
Importers, you have some important hedging decisions to make as we close out 2022.
To the day ahead, the economic calendar is full.
Regionally, activity data out of China, including retail sales, the release of RBA meeting minutes and GDP for Japan are the key events.
Offshore, UK jobs, the preliminary reading of 3Q eurozone GDP and US PPI are the potential market movers.
The procession of central bank speakers continues.
Whilst the Kiwi can maintain its upside bias, this week could deliver consolidative range bound trade. Technical momentum indicators across a broad array of risk-sensitive assets are firmly in overbought territory, suggesting that some profit taking may be on the cards.
It would not surprise to see the Kiwi fall back to 60 US cents and lower should the bulls need a breather.
Stuart Talman is Director of Sales at XE. You can contact him here.
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