By Stuart Talman, XE currency strategist
Tuesday’s trade has delivered see-sawing price action, risk sentiment improving on reports that China would take steps to improve vaccination rates amongst its senior citizens.
With just over 40% of people aged 80 and over having received a Covid booster shot, protecting the elderly against the virus is a critical step to enable China to adopt a living with Covid regime.
The positive headlines sent the New Zealand and Australian dollars to the top of the G10 leader board following pronounced selling to start the new week.
Having fallen from near 0.6250 into the 0.6150’s through early Tuesday morning trade, the Kiwi’s fortunes reversed throughout yesterday’s local and European sessions, surging back through 0.6250.
Buying momentum has evaporated during the first half of US trade, NZDUSD retreating back to 62 US cents.
Health experts across the globe agree that China’s abandonment of its covid-zero policy can only occur when both the quality of vaccinations improves and vaccination rates align with those of developed western nations.
Having recently being re-instated for an unprecedented third-term, President Xi Jinping leveraged China’s superior Covid management track record as a means to retain power.
Of course, this relative outperformance as measured by lower mortality rates, has been achieved via draconian lockdown laws which have frustrated the Chinese people, compelling citizens to take to the streets in rare protests over the weekend.
Recent positive developments regarding a potential China covid-zero U-turn had bolstered risk sentiment, propelling risk assets higher.
However reality has struck during the past week as record high daily case numbers serve as reminder that China’s reopening will not occur until the mRNA vaccinations used by western nations are approved and manufactured in China.
When this occurs, the New Zealand and Australian dollars likely outperform amidst a significant global risk rally.
In other news from overnight action, US consumer confidence fell to a four month low whilst prices of US homes (as measured by the S&P CoreLogic Case-Shiller 20-city home price index) increased at the slowest rate since December 2020.
US equities continue to pullback from recent highs, logging their third consecutive day of declines, albeit in relatively smaller ranges.
This week’s big test for US stocks and other risk sensitive assets will come via the US jobs report, released Friday evening.
A moderately softer than expected non-farm payrolls number likely to be a favourable outcome causing US equities to resume the year-end rally.
Looking to the day ahead, the major event on the global economic calendar is the preliminary reading of eurozone CPI for November. Country-level readings were released yesterday evening – most printing softer-than-expected.
Should headline inflation print below 10.4% this evening, the balance between a 75bps versus 50bps hike at the ECB’s 15 December meeting will shift back to a more even call, having moved in favour of the larger increment following a raft of hawkish ECB-speak.
The Kiwi has recouped all of Monday’s losses versus the euro to extend higher through 0.60, overnight highs logged a couple of pips above 0.6020.
We favour further upside as NZDEUR consolidates above the mid-point (located at 0.5996) of the August-October down-leg.
Across the Tasman the shiny new monthly CPI report is released. China PMIs also in focus during today’s local session.
It’s a busy night for US events including preliminary 3Q GDP, ADP employment change, the Fed’s preferred inflation gauge – PCE and Fed Chair Jerome Powell’s speech on the outlook for the economy and the changing labor market.
Will markets make a decisive move ahead of Friday’s US employment report or do we continue to trade within prevailing ranges?
We expect December will turn up the volatility dial.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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