By Stuart Talman, XE currency strategist
It was a week in which markets took a breather.
Following the prior week (w/c 07 NOV.) delivering huge gains for risk sensitive assets, notably the Nasdaq climbing over 8%, last week generated tighter ranges with a mild downside bias.
It was a busy week for central bank speak, over a dozen Fed officials sharing their latest views on the economy, jobs, inflation and current policy settings.
Most delivered a clearly hawkish message – inflation has not meaningfully receded, more work is needed, rates will stay higher for longer.
St Louis Fed president, James Bullard the most aggressive, flagging the possibility of a Fed funds rate climbing to somewhere between 5-7%.
The Fed funds target rate currently sits at 3.75-4.00%.
US equities and other risk sensitive assets held up quite well against the barrage of aggressive rhetoric.
In the wake of the Fed’s fourth consecutive 75bps hike and an encouragingly softer US CPI report for October, the market looks to have entered into a holding pattern ahead of the final US jobs and CPI reports and the year-end FOMC meeting on 14 December.
Friday’s sessions delivered choppy trade due to a lack of tier 1 data, $2.1 trillion in options expirations the catalyst to push US equities into positive territory during the final stages of US trade.
For the week, the Dow as flat, the S&P 500 down -0.69%, the Nasdaq falling -1.57%.
The New Zealand dollar was the strongest performing G10 currency on Friday, adding close to half-a-percent to reclaim 62 US cents in the New York morning before ending the week near 0.6150.
Leading the way with a weekly gain of 0.80%, the Kiwi ranged between 0.6060 and just above 0.6200.
Friday’s NZD outperformance relative to its major peers may be attributed to expectations for a hawkish policy update from the RBNZ this Wednesday.
Unlike other central banks, the RBNZ could step-up to a 75bps hike given the mix of recent strong CPI and jobs numbers and rising inflation expectations.
The interest rate sensitive Kiwi-Aussie cross looks to be sending the message that 75bps will be favoured over 50bps, lifting the OCR to 4.25%.
Surging through 0.9200 for the first time since April, NZDAUD logged Friday’s high a few pips shy of 0.9230 and set-up to extend higher should the RBNZ opt for the larger increment.
Markets price a 50/50 chance of 75bps vs 50bps whilst the majority (15 of 23 via Reuters) of polled economists favour 75bps.
The Kiwi gained close to 1.30% against Aussie for the week.
Similar sized weekly gains occurred against the euro, whilst the Kiwi added close to 2% against the yen.
In a big week for the pound, the Kiwi gained close to 0.4%, NZDGBP remaining in the 0.5135 to 0.5220 range that has prevailed over the past 2½ weeks.
As expected UK Chancellor Hunt delivered a fiscally responsible budget update that included higher taxes and lower government spending, mostly due to commence following the next election in 2024.
A grim outlook for the UK economy likely to see the NZDGBP cross trade in the upper half of the 0.4900 to 0.5500 range that has contained mush of the past five year’s price action.
We expect the cross to break through key technical resistance near 0.5200 this week.
Looking to the week ahead, the aforementioned RBNZ policy update, Wednesday, is the major local and regional event.
Tomorrow delivers local trade balance in addition to a speech from RBA Governor Philip Lowe.
Major offshore releases include preliminary Markit PMIs for the US, EU, AUS, and UK; US durable goods orders, FOMC and ECB minutes.
Other events and developments include growing COVID numbers in China and the Thanksgiving holiday in the US which includes “Black Friday” sales.
Oh, and of course the Beautiful Game – the football World Cup officially kicking off this morning.
Thanksgiving week is traditionally a good one for US stocks. We think this in addition to a hawkish RBNZ may deliver another week of gains for the Kiwi.
The 200 day moving average located near 0.6230 is the major upside hurdle to be tested.
Stuart Talman is Director of Sales at XE. You can contact him here.
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