American Thanksgiving week is typically a good week for risk assets, and so far that is holding in 2022

By Stuart Talman, XE currency strategist

As expected, price action has been subdued throughout Thursday’s sessions as the focus shifts from markets to turkey, pumpkin pie and American football.

US cash equity and bond markets are closed whilst futures markets are open, but trade with significantly diminished volume. Cash markets will re-open Friday, albeit in a shortened session.

Thanksgiving week is typically a good week for risk assets – the S&P 500 rising in 60 of the past 72 years in the Wednesday to Friday stretch. That’s an 83% success rate for higher stocks.

For the entire week (MON. to FRI.), the trend continues, albeit at a lower percentage of historical gains, the S&P 500 climbing in 49 of the past 72 years for a 68% success rate.

Sure enough, Thanksgiving week 2022 is adhering to the trend, currently over 1.7% higher for the week.

S&P 500 futures are higher through Thursday’s trade increasing the probability that when the cash market re-commences trade, Friday, further upside beckons.

Following a mild dip in risk sentiment earlier in the week, driven primarily by China’s daily covid cases reaching a record high (exceeding 30K), risk assets have resumed their year-end rally.

The New Zealand dollar has been the clear out-performer over the past month, leading its G10 peers higher with a gain of close to 9%.

A proxy for global risk sentiment, the Australian dollar has been the second best performer during this stretch, gaining close to 6%.

Thursday brought more upside for the Kiwi logging highs a pip or so shy of 0.6290, lifting the pair through its 200 day moving average for the first time since early April.

If price action were to consolidate above this widely monitored trend following indicator, it would embolden the NZD bulls, likely driving the currency pair back up to its prominent August high near 0.6470.

The New Zealand dollar and other risk sensitive assets have been rallying on hopes that inflation in the US has peaked, thereby allowing the Federal Reserve to start slowing the pace of rate hikes following 4 consecutive 75bps hikes and an accumulative 375bps of tightening through 2022.

The rally was briefly halted via a recent deluge of hawkish rhetoric from Fed officials, warning that there is still much heavy lifting ahead to bring down persistently high inflation.

However the market has looked through the Fed’s higher for longer mantra, instead focusing on the Fed’s expected downshift to 50bps at the 14 December FOMC meeting.

Evidence of this was provided early yesterday morning with the release of FOMC minutes from the November meeting. The major takeaway – the majority of FOMC voters believe it is now appropriate to slow the tightening cycle.

The latest bear market rally for US stocks can continue should key upcoming data  signal that the US labour market is cooling and core inflation eases further.

This will firm market pricing for a Fed funds terminal rate near 5%.

Covid developments out of China also a factor.

When the current outbreak peaks and recedes, this is another tailwind that will propel risk assets higher, particularly the China-sensitive Aussie dollar which continues to underperform against the Kiwi.

Wednesday’s peak just above 0.93 is the highest the antipodean cross has traded since late March.

The RBNZ stepped up its hawkishness this week, lifting the OCR by a historical 75bps increment in addition to projecting a terminal rate at 5.5%.

Now that we’re past this event with firm expectations of another 75bps hike in February and 50bos in April, the bar is set incredibly high for further RBNZ hawkish surprises.

Given this and the inevitable shift in narrative from central bank policy relativity to deteriorating growth, the Aussie likely starts to regain the ascendancy through the 1H 2023.

Picking tops and bottoms is a notoriously hard gig, but we’ll have a crack and favour this week’s high evolving into a significant medium term high as we round out the year.

Technical indicators are providing early signals that a U-turn may be imminent.

Against its other major peers, the Kiwi continues to range trade against the surprisingly resilient pound and extends higher against the euro and yen.

We expect further upside against these three majors as we close out 2022.

To the day ahead, the reading of 3Q retail sales for the NZ economy is the region’s sole tier 1 macroeconomic data release. Household spending across the nation will come under ever increasing pressure as the RBNZ assumes the mantle as the most aggressive major central bank.

The offshore calendar is absent any market moving releases.

Thanksgiving last year was absolute mayhem for markets as the mix of the omicron outbreak and thin holiday liquidity caused a mini-meltdown.

We’re likely to witness a yawn-fest over the next 24 hours – very tight ranges ... the Kiwi to maintain a modest upside bias.

Stuart Talman is Director of Sales at XE. You can contact him here.