By Stuart Talman, XE currency strategist
Markets were mixed in Wednesday’s action – US equities trading with a mild downside bias, whilst US bond yields fell, price action representative of recession fears.
However pro-cyclical currencies logged modest gains on the back of more positive China headlines – the authorities taking further steps towards a full re-opening.
The New Zealand dollar once again is the strongest performing G10 currency, gaining close to three-quarters-of a percent.
Yesterday’s local session was a yawn-fest, the Kiwi trading in a tight 30 point range between 0.6310 and 0.6340.
Price action sprung to life through the European afternoon as reports were released detailing the most sweeping changes to China’s covid policies since the pandemic began almost three years ago.
Ten new Covid rules were announced – forming a clear path towards a full-reopening early next year.
The rules included measures to permit people to quarantine at home, remove the need for mass testing, ease the ultra-strict lockdown measures and increase vaccination rates for the elderly.
Whilst it is good news, there are still questions regarding the near-term growth outlook for China as the relaxation of covid-protocols will likely lead to a surge in cases and fatalities.
Medium-term, the growth outlook is far more positive.
Markets had moved to price in this type of response following on from the authorities constructive response to the recent mass protests.
The Kiwi surged higher, logging overnight highs in the 0.6380’s before paring gains, easing back to 0.6350.
The NZD sold-off hard during Monday’s overnight session, stronger-than-expected US services activity data fuelling concerns that the Fed will have to prolong the current tightening cycle, lifting the Fed funds rate higher than current expectations.
The Kiwi dollar bulls have wrestled back control over the past 48 hours, although price action remains entrenched in a prevailing 0.6300 – 0.6440 range that has formed over the past 6 trading days.
A pivotal week next week delivers US CPI and central bank ate decisions from the Fed, BoE and ECB.....likely to dictate the market’s next key directional move as we head into the new year.
If the Fed delivers a hawkish set of dot-plots, projecting a higher terminal rate than current market pricing (4.92%), risk assets likely come under selling pressure, significant tops forming.
Conversely if the dot-plots mirror the previous edition and Jerome Powell sends the message that the Fed can win the inflation battle via the current policy path, the fabled soft-landing will gain traction - risk assets to rip higher.
In other news from yesterday, the Bank of Canada hiked rates by 50bps, lifting the policy rate to 4.25%. The accompanying statement hinted that the BoC is nearing the end of its tightening cycle.
The CAD barely moved on the policy update, trading flat for the day.
Across the Tasman, 3Q Aussie GDP came in a little weaker than expected (0.6% vs 0.7%). Household spending, the largest component has been easing but still remains at relatively strong levels.
Wages and prices remain under upside pressure, a factor that will likely see the RBA implement another one or two 25bps hikes early next year.
The Kiwi extended higher versus the Aussie, logging a new 2022 high a couple of pips above 0.9490 before paring gains to 0.9460.
The day ahead looks to be another quiet one given the extremely light economic calendar.
Expectations are for further range-bound trade for the Kiwi, settling in the mid to high 0.63’s.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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