By Stuart Talman, XE currency strategist
The upside bias for risk sensitive assets continued through Tuesday as another reading of US inflation supported the view that the Fed will enter a new phase of its tightening cycle by dialling down the size of its rate hikes.
The Producer Price Index (PPI) measures the average change over time in the prices domestic producers receive for their goods and services, providing a key measure of prices at the wholesale level.
US equities spiked higher at the open as PPI for October, like last week’s CPI report, printed weaker than expected.
The result further increases the odds that the Fed will downshift to a 50bps hike at the 14 December FOMC meeting, market pricing nearing 90% for the half-percentage point increment.
A month ago market pricing assigned a 70% chance of a fifth consecutive 75bps hike.
The peak inflation, peak Fed aggression narrative is generating a fierce year-end rally for risk sensitive assets which had been beaten down throughout 2022.
As long as key US macroeconomic data releases print in a sweet spot, indicative of a modestly cooling US economy, the upside surge for US equities, and pro-cyclical currencies, including the New Zealand and Australian dollars will continue through to the new year.
The Kiwi was one of the strongest performing currencies through Tuesday’s sessions, climbing over 1% to trade through 62 US cents for the first time since late August.
Commencing the new week below 0.61, NZDUSD failed to break through 0.6120 resistance on multiple occasions through Monday and yesterday’s local session as activity data out of China cam in softer-than-expected.
However, the PPI release was the catalyst for the spike higher, the Kiwi surging a few pips above 0.62, falling back near 0.6120 to then ascend back into the high 0.61’s as US stocks traded higher through the New York morning.
Amongst G10 currencies, the Pound sat atop the leader board with the Kiwi and the Aussie as the UK awaits Thursday’s all-important budget announcement from UK Chancellor Jeremy Hunt.
GBP has been one of the strongest performers over the past couple of weeks, extending gains overnight as strong UK jobs data indicated ongoing labour market tightness.
Having logged an all-time record low below 1.0400 seven weeks back, GBPUSD traded through 1.2000 for the first time since mid-August, rebounding an eye-watering 16% from mid-August’s nadir.
To date, November has delivered range bound trade for the Kiwi against the pound, price action largely contained between the 38.2% (located at 0.5135) and 50% (near 0.52) Fibonacci retracement of the late September to mid-October down surge.
We look for NZDGBP to break up through 0.52 to challenge key technical resistance near 0.5320 as we head into the final stages of 2022.
US equity markets as at time of morning update release and may not represent session closing prices.
In other news, yesterday, the RBA released minutes of its November meeting in which the Aussie central bank opted for a repeat 25bps hike despite the surprisingly large 3Q AUS CPI beat.
The RBA meets more frequently than its major central bank peers, a cadence that now justifies a more steady approach given the lag effects of implementing monetary policy adjustments.
The central bank commenting in the minutes: “acting consistently would support confidence in the monetary policy framework among financial market participants and the community more broadly.”
The minutes were viewed through a dovish lens given upcoming rate hikes are “expected” rather than previously “likely” in addition to signalling a possible pause ahead.
The RBA’s dovish shift back in September whilst the RBNZ not only maintained but stepped-up its hawkish outlook, has been the driver for the significant NZDAUD rebound over the past six weeks.....although the leg-up has lost momentum, recently topping out in the 0.9180’s.
The pair has commenced this week largely ranging between 0.9085 and 0.9130 with Aussie employment data, tomorrow, possibly generating a more pronounced directional move.
Provided the RBNZ does not deliver a hawkish 75bps hike at next Wednesday’s monetary policy meeting, we don’t expect a move above 0.92.
We look for the antipodean cross to range between 0.9150 and 0.8950 for the remainder of the year.
Looking to the day ahead there are three major tier 1 macroeconomic data releases to captivate the market: UK and Canadian CPI and US retail sales.
It’s a quiet day on the local calendar.
Having ploughed through 0.6102, the 61.8% Fibonacci retracement of the August-October sell-off, and peeking above 62 US cents, the next major upside hurdle for the Kiwi to clear is its 200 day moving average, located in the 0.6230’s.
We favour consolidative price action in the high 0.61’s, low 0.62’s before undertaking this technically important challenge but would not be surprised if NZDUSD has a crack through Wednesday given the impressive upside momentum.
One factor that could halt the risk rally through the day’s action is a stronger than expected US retail sales report.
Stuart Talman is Director of Sales at XE. You can contact him here.
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