By Stuart Talman, XE currency strategist
Souring risk sentiment has punctuated the start of the new week amidst concerns that Chinese officials may once again enforce widespread lockdowns following the first covid-related death since May 26.
The impressive relief rally that commenced in mid-October showed signs of exhaustion last week as a wave of hawkish Fed speakers curbed the market’s buoyant mood.
Commencing Monday’s trade near 0.6150, the New Zealand dollar has fallen steadily throughout both local and offshore trade, logging this morning’s low a few pips below 0.6090.
The Kiwi rocketed through 60 US cents following softer than expected US CPI data, released on 10 November. From here NZDUSD has consolidated the upside move, last week’s range forming between 0.6060 and 0.6200.
Twice last week the Kiwi attempted a break above 62 US cents, unable to do so against the backdrop of Fed rhetoric, numerous officials reminding the market that despite softer readings, persistently high inflation remains the number one problem for the US economy.
Having stopped short of challenging the 200 day moving average (200d MA), located in the 0.6230’s, the New Zealand dollar seeks its next key directional cue, likely to be delivered via tomorrow’s RBNZ interest rate decision – both 50bps and 75 bps in play.
If the RBNZ opts for the larger increment, this likely opens up a path for the Kiwi to challenge the widely monitored 200d MA.
Conversely, if the RBNZ sticks with a sixth consecutive half-a-percent hike, NZDUSD could pullback to the midpoint of the August-October downswing, located around 0.5990.
Given interest rate futures favour a 75bps hike and as do 15 of 23 polled economists (via Reuters), risks are skewed to the downside – the NZD likely to sell off harder relative to a potential upswing should Governor Orr deliver a hawkish raise.
More broadly, the market’s gloomier mood also not aiding further upside for the Kiwi and other risk-sensitive currencies.
Just a couple of weeks ago, the COVID news flow out of China turned decidedly positive as reports circulated that Chinese officials were taking steps to assess a re-opening framework.
And last week more positive news came via the announcement of a 16-point plan to rescue the embattled property market, initiatives ranging from addressing the liquidity crisis faced by developers and a “temporary” easing of a signature restriction on bank lending.
However, relaxed COVID protocols in conjunction with the Golden week holiday in early October have fuelled an acceleration in case numbers, the country reporting over 23,000 cases over the weekend.
The latest fatality could test the tolerance of Chinese authorities whilst persistent outbreaks increase the likelihood of additional deaths.
The news flow is having a pronounced effect on financial markets, not just in China but across the globe.
The positive, re-opening headlines delivering huge gains for the Hang Seng and crude oil, whilst also benefitting China-sensitive currencies including the Australian and New Zealand dollars.
The more recent negative headlines have caused steep declines.
WTI crude has plummeted close to 20% from its 07 November peak near US$94/barrel, overnight lows logged near $75 – the lowest level since January.
Recession fears and rumours that OPEC+ members are planning production increases also driving crude lower.
More broadly, the commodity complex has come under selling pressure over the past week, another factor placing a cap on the Kiwi, Aussie and other commodity linked currencies.
Looking to the day ahead, the local calendar delivers trade balance data.
Across the Tasman, the focus will be on a speech from RBA Governor Phillip Lowe at this evenings Committee for Economic Development of Australia dinner. Lowe’s speech is titled Price Stability, the Supply Side and Prosperity – monitored for any comments that signal intentions for the near-term policy path.
Against the backdrop of weaker commodities and expectations of a hawkish RBNZ, the Kiwi continues to outperform the Aussie, logging a fourth consecutive day of gains – NZDAUD climbing to within a couple of pips of 0.9250.
The antipodean pair last traded above 0.9250 in early April.
It’s a quiet night for major offshore releases – Canadian retail sales and preliminary readings of eurozone consumer confidence not likely to influence price action.
If the news flow out of China does not further deteriorate, expectations are for relatively tight ranges throughout Tuesday.
The Kiwi may drift lower to test last week’s lows near 0.6060.
Stuart Talman is Director of Sales at XE. You can contact him here.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.