By Stuart Talman, XE currency strategist
News flow has been close to non-existent overnight, the economic calendar absent any market moving data releases.
Markets continue to trade with a cautious tone ahead of a pivotal week delivering the final US CPI report or 2022 and interest rate decisions from the Fed, ECB and BoE.
US equities have been on the slide over the past 4 trading days, the S&P 500 easing back from the widely monitored 200 day moving average which it briefly peeked above late last week.
It did the same back in August – a fierce bear market rally lifting the gauge close to 19% of then cycle lows, touching the 200 day moving average to then aggressively resume the next down leg of this current bear market , falling over 19% to log fresh cycle lows on 13 October.
Will this current bear market rally follow the path of multiple rallies this year, whipping back to the downside?
We may well get the answer next week if the Fed decides to send a year-end message that it will likely continue to hike through 5% during the first half of 2023.
Certainly the US yield curve’s deep inversion is sending the message that US stocks have further to plunge, predicting a recessionary bear market ahead.
Historically, yield curve inversion has been a reliable indicator of recessions and US stocks bottom when the curve shifts back positive following the Fed easing monetary policy.
Remember, interest rates are at the core of all financial markets.
For those confidently calling a market bottom, they are foolishly discounting yield curve signalling.
Having plunged to within a couple of pips of 63 US cents during Monday’s US session, the New Zealand dollar has range traded over the past 24 hours, finding resistance around 0.6350 and support in the low 0.63’s, testing the near term floor on three occasions.
Ranges have been predictably tight given the lack of data flow and central bank speakers – the Kiwi modestly firmer against its major peers.
The sole noteworthy news piece from the past 24 hours was the Reserve Bank of Australia’s interest rate decision – the widely expected 25bps hike delivered. The key points:
- RBA lifts cash rate by 25bps to 3.10%
- Expects inflation to peak around 8%
- Maintains tightening bias
The final monetary policy update for the year brings the RBA’s cumulative tightening for this cycle to 300bps.
Compare this to the RBNZ – currently at 400bps whilst the Fed has tightened by 375bps.
Following the RBA’s October downshift to 25bps hikes, it is now regarded as the most dovish of all the major central banks.
In the final paragraph of its monetary policy statement, the RBA commented:
The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course...... The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.
The view that an RBA pause is imminent has been doing the rounds with most analysts favouring an additional 25-50bps of hikes to end this cycle, delivering a terminal rate in the 3.35% to 3.60% region.
Should the ultra-tight AUS labour market start to soften between now and the RBA’s next meeting on 07 February and inflation show further signs of easing, the RBA may well be done already.
The rate sensitive antipodean cross had climbed through 0.9460 in the lead up the yesterday’s decision, NZDAUD falling back through 0.9380 as the Asian session wrapped.
It has since pared most losses, ascending back near 0.9450.
To the day ahead, the economic calendar gets a little more interesting.
Aussie GDP and Trade Balance for China are the region’s major data points.
Overnight action delivers the latest reading of eurozone GDP and the Bank of Canada’s interest rate decision, expected to add a further 50bps of tightening to the 350bps administered this cycle.
The BoC’s policy rate to end the year at 4.25%.
It’s another quiet night in the US as will Thursday night before PPI and the latest Uni of Michigan consumer confidence survey completes the week.
The Kiwi looks set to ease below 63 US cents given the lack of both local and US centric event risk.
Markets likely to maintain tentative price action in tight ranges.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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