By Stuart Talman, XE currency strategist
Risk assets extended higher through Wednesday, encouraged by a pre-Thanksgiving US data dump signalling that the US economy continues to modestly cool, bringing down price pressures.
The New Zealand dollar has ripped through 62 US cents, driven higher by the RBNZ’s historical hike and softer US bond yields weighing on the dollar.
US equities are following the Thanksgiving week trend, climbing for the second day in a row as investors were encouraged by the latest update to the Uni of Michigan Consumer Sentiment survey which again reported an easing in inflation expectations.
US markets will be closed tomorrow for the Thanksgiving day holiday whilst Friday will deliver shortened sessions for stocks and bonds.
In addition to the latest read on consumer sentiment, preliminary readings of manufacturing and services activity were released via the S&P Global PMIs – all three gauges printing softer-than-expected and below the 50.0 level that signifies contractionary activity.
Accompanying the PMI’s, S&P Global commenting ...
"November saw a solid contraction in business activity across the US private sector. Lower output was seen across both manufacturing and service sectors amid increasingly steep downturns in demand. The overall fall in activity was the second-fastest since May 2020 as inflation, rising borrowing costs and economic uncertainty weighed on demand."
... encouraging developments for the Fed’s inflation fight.
Weekly initial jobless claims also released a day early due to Thanksgiving, climbing to their highest point in 13 weeks, indicating a softening in the US jobs market.
US bond yields fell in response to the data deluge, dragging the US dollar lower.
PMIs for the eurozone and UK exceeded consensus forecasts but were also firmly in contractionary territory.
The pound is the strongest of the G10 currencies for Wednesday, closely followed by the Kiwi. NZDGBP continues to trade in the prevailing 0.5135 – 0.5220 range that has constrained price action throughout November.
Turning our attention to Wednesday’s major event – the RBNZ opted for a 75bps hike, an outcome that was predicted by the majority of polled economists and also favoured via market pricing.
The key points from the hawkish interest rate decision and accompanying statement:
- RBNZ hikes by 75bps to 4.25%
- Terminal rate lifted to 5.5%
- RBNZ lifts inflation and unemployment forecasts
- RBNZ forecasts recession for 2023
It was a historical day for our central bank, implementing the largest rate hike in history, citing persistently high inflation becoming embedded in the New Zealand economy.
Whilst the result was widely expected, both the adjustment to the projected terminal rate and the bank acknowledging that the decision was a choice between 75bps or a full percentage point, positioned the policy update as hawkish.
The previous monetary policy statement, released in August projected at terminal rate at 4.1%.
Over the past few months both realised and inflation and inflation expectations have surprised to the upside whilst the jobs market remains holistically tight.
The risks of a wage-price spiral have increased significantly, forcing the RBNZ to shift up the larger hike.
With a terminal rate now projected at 5.5%, the RBNZ looks set to hike by another 75bps in February to then shift back down to a 50bps hike in April.
The ninth hike of this cycle brings the accumulative level of tightening to 400bps.
Assuming the Fed hikes by 50bps on 14 December, bringing their accumulative tightening to 425bps, the RBNZ is only outpaced by the Fed.
The Bank of England likely hikes by 50bps on 15 December, lifting their accumulative hikes to 340bps whilst the RBA’s expected 25bps on 6 December brings the 2022 total to 300bps.
Only the Fed and RBNZ are currently projected to have terminal rates in excess of 5%.
The immediate reaction from the Kiwi was more muted than expected, spiking from 0.6150 through 0.6190 before softening back to the mid 0.61’s through the Asian afternoon.
NZDUSD continued to range between 0.6150 and 0.6190 through the European session before being propelled higher following the aforementioned US data dump.
Logging this morning’s highs in the 0.6230’s, it’s the highest the NZD has traded since late August.
Importantly, Wednesday’s ascent has lifted the Kiwi back to the 200 day moving average (200d MA), one of the most widely followed trend following technical indicators.
The Kiwi last closed above its 200d MA in early April having attempted and failed to sustain prolonged price action above here. You have to head back to the 12 months from June 2020 for the last period that NZDUSD traded above its 200d MA with conviction.
If price action can consolidate above the 200d MA in the short to medium term, this may be the early signal of bullish run for the Kiwi.
However, given the cloudy global growth outlook, including the RBNZ’s own forecasts of a 2023 recession, it would be surprising to see the Kiwi go on a prolonged run higher from current levels.
Perhaps that’s a story for 2H 2023.
One other currency pair that may find it challenging to extend higher is NZDAUD having touched 0.93 for the first time since March.
Bouncing close to 7% from its late September low , the pair’s ascent has been driven by divergent central bank policy – the RBA slowing the pace of hikes whilst the RBNZ puts the foot firmly on the accelerator.
Now that this narrative has been baked into the past 6 weeks price action, the bar is set high for further NZDAUD upside.
Focus will shift from central bank relativities to the growth outlook – the Australian economy better positioned to outperform.
To the day ahead FOMC minutes are released in under an hour. Given the wave of Fed-speak over the past fortnight, the minutes are unlikely to deliver anything new to digest.
With the US on holiday Thursday and an abbreviated Friday session, expectations are for tight ranges for the next 48 hours.
We look for the Kiwi to consolidate in a 0.6150 – 0.6340 range.
Stuart Talman is Director of Sales at XE. You can contact him here.
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