By Stuart Talman, XE currency strategist
The fierce rebound in risk assets that commenced in mid-October is showing signs of exhaustion, the velocity of gains slowing in recent days as price action trades in relatively smaller daily ranges.
Peaking a few pips above 62 US cents during the early hours of Wednesday morning, the New Zealand dollar has ranged between 0.6130 and 0.6190 over the past 24 hours, awaiting its next directional cue.
US equities have traded the first half of the US session in negative territory, albeit modest losses. The S&P 500 is down around a half a percent heading into the last couple of hours of trade.
Having shrugged of Fed Chair Powell’s hawkish press conference at the 02 November FOMC meeting, and surging higher on the back of the softer-than-expected October US CPI report, released 10 November, the three major US equity indices have ascended to major technical resistance regions.
A period of consolidative price action may be the way forward over the next couple of weeks before the final US jobs report (02 DEC.) and US CPI report (13 DEC.) for the year are released.
These pivotal data points likely to shape the Fed’s tightening cycle for 1H 2023.
Additional softening for the US labour market in addition to further evidence that core inflation has not only peaked, but is tracking lower will firm bets for a Fed terminal rate in the 4.50% to 5.00% region.
This likely to deliver another leg-up for US stocks and other risk-sensitive assets as we head into the festive season.
Conversely, if US job growth remains strong and the unemployment rate anchored around 50 year lows whilst core inflation does not retract from its September peak, the Fed will be forced to maintain rate hikes through the first half of 2023, lifting the terminal rate above 5%.
In this scenario, the current fierce bear market rally will swiftly U-turn with cycle lows back in the market’s crosshairs.
The major data release out of the US for Wednesday, retail sales, exceeded expectations (1.3% MoM vs 1.0%, expected) pointing to resilient consumer despite the Fed’s year to date 225bps of tightening.
After a flat reading in September, it was the strongest increase for household spending in 8 months.
Despite the upside surprise, there was muted reaction – the dollar marginally higher whist the yield on the benchmark US ten year bond extended further below 3.8%.
Ideally, the Fed would like to see flat to softer readings of retail spending.
The other major data points for Wednesday’s offshore sessions were CPI for both the UK and Canada, the latter in line - headline at 6.9% having peaked at 8.1% in June.
Like the RBA, the Bank of Canada has recently started to slow the pace of rate hikes, opting for a surprise 50bps hike at its most recent meeting.
Headline inflation in the UK jumped to 11.1%, exceeding the consensus forecast of 10.7%, reaching the highest level since October 1981. The rise was constrained by the UK government’s Energy Price Guarantee.
Despite the upside surprise, the BoE is expected to shift back down to w 50bps hike at its December meeting due to signs that both headline and core inflation is peaking in addition to the UK economy heading into recession.
Awaiting today’s important UK fiscal policy update, the pound barely moved on the CPI data, tracking sideways against the dollar near 1.1900.
Against the pound, the Kiwi continues to trade either side of key technical resistance near 0.52, looking poised for a break higher.
UK chancellor Jeremy Hunt’s budget announcement is expected to be GBP-negative as large spending cuts are adopted.
We look for NZDGBP to form a higher range above 0.52 in the short to medium term.
Having retreated yesterday morning on headlines that a Russian missile had landed in Poland, killing two, the euro recovered as new reports confirmed that it was actually a stray Ukrainian missile.
EUR breathed a sign of relief, trading back up through 1.0400 versus the dollar, pushing NZDEUR back below 0.5950.
Early November highs were logged in the 0.5980’s, just shy of key NZDEUR technical resistance at 0.5996 – the 50% retracement of the August-October downswing. The pair has ranged between 0.5850 and 0.5970 over the past week, seemingly re-grouping before mounting another test of 0.6000.
Looking to the day ahead, the major regional data release is Aussie jobs numbers – the unemployment rate expected to tick up from 3.5% to 3.6% having marked a multi-decade low at 3.4% in July. Jobs growth is projected at 15K.
Price action for NZDAUD has been contained between 0.9090 and 0.9135 this week and may well break out of the range should we receive an AUS employment report that materially deviates from the consensus forecast.
A softer report likely to drive the antipodean cross back up through 0.9150 as the RBA’s September dovish pivot is justified.
The aforementioned UK budget update is the key event for markets, Thursday.
Aside from the October update on eurozone inflation, the offshore calendar is light......we’re likely to see relatively muted price action.
Given the leg higher has slowed over the past 48 hours, we look for NZDUSD to trade with a mild downside bias.
Stuart Talman is Director of Sales at XE. You can contact him here.
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