By Stuart Talman, XE currency strategist
Traders returned from the Thanksgiving day holiday albeit it in a shortened session Friday, price action punctuated by lighter volumes and condensed ranges.
Following the lead of higher eurozone rates, US bond yields were higher, supporting a modestly higher USD.
Having logged the week’s high near 0.6290 on Thursday, the New Zealand dollar eased off its three month highs to end the week near 0.6250.
Starting near 0.6150, the Kiwi added over 1.5% for the week logging its sixth consecutive week of gains.
Clearing major upside technical hurdles over the past two weeks, last week’s price action lifted the New Zealand dollar to its 200 day moving average (200d MA) – a widely monitored trend following indicator.
The NZD has not maintained sustained price action above the 200d MA since the 12 months from June 2020 when the Kiwi outperformed on the back of the nation’s relative Covid management outperformance.
There have been short periods in late 2021 and March-April 2022 when price action peeked back above......Thursday and Friday’s thigh ranges looking to re-establish a foothold above.
This week’s behaviour around the 200d MA may signal the Kiwi’s path through December and into the early stages of the new year.
A decisive break above the 200d MA likely opens a path to a re-test of the August high near 0.6470.
Conversely, failure to consolidate above may usher in a period of consolidative range bound trade between 0.6000 and 0.6300 as markets await their next directional cues.
Incoming US data, the Fed slowing the pace of rate hikes, global growth concerns and China’s covid situation – these are the major cues dictating direction.
Reports broke over the weekend of protects across multiple cities in China, residents taking to the streets to protest against lockdown measures that hampered the rescue efforts of a fatal fire in a residential tower.
Demonstrations took place in Beijing, Wuhan and Xinjiang – protesters calling for President Xi Jinping to step down.
A video released on social media showed a woman screaming in the inflamed apartment block in Urumqi, the capital of the far-western Xinjian region. The building had been blocked off by the large steel gates used by the authorities to contain infected sites.
At least 10 people were reported to have died in the blaze.
Social instability and unrest may cause a re-think for investors who had piled into China sensitive assets over recent weeks as the authorities relaxed some Covid protocols and announced a new plan to support the embattled property sector.
A reversal of these capital flows is not great news for the China-sensitive New Zealand and Australia and dollars.
We may be in for a soft open this morning.
To the week ahead, the headline event is Friday’s US employment report – just over 200K new jobs and a steady 3.7% unemployment rate are the consensus projections.
A mild downside miss below 200K would be a favourable result for both the Fed and markets, indicative of a desired softening in the persistently tight US labour market.
This would support the Fed’s downshift to a 50bps hike on 14 December and keep market pricing for the terminal rate anchored near 5%.
In this scenario we likely see risk assets respond favourably.
The other major offshore tier 1 macroeconomic data point is the preliminary reading of eurozone inflation. October’s reading came in very hot at 10.6%. Headline inflation is projected to ease to 10.4% for November.
The ECB meets for the final time this year the day after the FOMC meeting – 15 December. Swaps markets currently price a 30% chance of a third consecutive 75bps hike.
Like NZDUSD, NZDEUR has ascended to meet its 200 day moving average, currently located near 0.6000. Last week, the pair logged a weekly high a couple of pips above 0.6030.
We look for NZDEUR to consolidate above 0.6000 as we close out 2022.
It’s a light week for local market moving data releases – no tier 1 data.
The key event during today’s local session – AUS retail sales. The recent run of household spending data has been strong.
China covid headlines and US jobs – these two factors likely to determine the week’s direction.....or perhaps a lack thereof.
Perhaps it might be week of consolidative price action following weeks of impressive gains.
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.