By Stuart Talman, XE currency strategist
We hope that you had a relaxing and enjoyable festive break with family and friends; rested, recharged and reinvigorated - ready to jump into 2023.
What a year we’ve just had!
2022 will be remembered as one of the most brutally captivating years in modern times for global financial markets.
Risk assets were pummelled as inflation soared, the Fed (belatedly) responded with the most aggressive tightening cycle in decades, Russia invaded Ukraine, and China’s covid-zero policy bewildered before an abrupt backflip to end the year.
A historically unique year delivered horrific combined returns for stocks and bonds – a traditional portfolio consisting of a 60/40 stock/bonds weighting producing its worst performance since 1932, when the world was in the midst of the Great Depression.
US equities had their worst year since the 2008 GFC, the rate sensitive Nasdaq declining 33.10%, the S&P 500 down 19.44% and the Dow down 8.78%.
The US dollar soared as the Fed played catch-up, at its late September high, the dollar index (DXY) climbing close to 20% for the year before ending 2022 up over 8%.
On 13 October, the US released CPI – the September edition marking the peak for core inflation at 6.6%, coinciding with the New Zealand dollar’s 2022 nadir, down almost 20%, just above 55 US cents.
The final quarter of a bruising year delivering a sharp rebound for the Kiwi and other risk sensitive assets, NZDUSD ending the year down close to 8%, closing above 63 US cents.
When we signed off the morning update in late December, the penultimate week for 2022 delivered hawkish policy updates from the Fed (50bps hike to 4.25% - 4.50%) and the ECB (50bps to 2.50%) whilst a divided Bank of England delivered a dovish hike (50bps to 3.50%).
Locally, 3Q GDP surprised to the upside, further lifting terminal rate expectations for the OCR, the RBNZ now expected to hike into the mid 5% region.
The major data point for the week (w/c 12 DEC.) was US CPI for November – the core reading delivering a second consecutive monthly downside surprise, falling to 6% (from 6.3% in OCT.).
Having peaked at 9.1% back in June as WTI Crude reversed from near US$124/barrel, headline inflation for the US economy ended 2022 at 7.1%.
High inflation will continue to be the major theme during the first half of 2023, however the question for the market has shifted.....
No longer is it a question of when will inflation peak, but rather one of stickiness – how quickly (or slowly) will inflation recede?
The week ahead will deliver the latest evidence – US CPI for December released during Thursday’s overnight session is this week’s major event.
Before we turn our focus to upcoming events, let’s turn back to summarise the key events that impacted markets in late December and 2023’s first week of trading.
The final week of the year delivered a shock policy update from the uber-dovish Bank of Japan, tweaking its controversial yield curve control (YCC) policy, widening the 10-year bond yield target from 0.25% to 0.50%.
Policy settings were expected to remain unchanged until current BoJ Governor Haruhiko Kuroda steps down in April.
At his press conference, Governor Kuroda denied that the move was not the first step towards a further widening of the YCC target nor more broadly - policy normalisation.
The market chose not to believe Kuroda.
The Yen soared over 4% versus the dollar, USDJPY falling from near 138.00 to near 130.00 on 20 December. Last week’s lows were marked below 130.00 before USDJPY ended the week back above 132.00.
Having marked 2022 highs above 88.00 on 13 December, NZDJPY plummeted through 83.00 immediately following the BoJ policy shock. Marking last week’s lows just above 81.00 (some 8% from the DEC. high), NZDJPY recovered back to 84.00 on improving risk sentiment.
It will likely be a compelling year for the Japanese Yen – one in which JPY could take flight should further monetary policy convergence occur alongside the traditional safe haven bid if the heavily discounted global recession occurs.
Look for the JPY to remain supported through the first quarter.
Your key downside level for NZDJPY is 81.00 – a break below here likely opens a path back to early 2022 lows in the mid 70.00’s.
Maintaining the Asian focus, the other major development in late December was China’s abrupt abandonment of Covid-zero, preparing the economy for a full re-opening, likely to occur during the first half of 2023.
Whilst we’ll never know the true numbers as omicron surges throughout the world’s most populous nation, daily infection rates are staggering, placing China’s health system under immense stress.
Markets have looked through the near-term stress this is causing the Chinese people and the disruption caused to the “world’s factory” as a huge proportion of the working population is infected, temporarily unable to work.
Instead, the focus is on the medium term outlook, looking forward to the inevitable progression through the omicron wave and the sharp rebound in activity as the Chinese economy fully re-opens.
The Australian dollar has been the primary beneficiary of this narrative – the strongest performing of the G10 currencies over the past month.
News that Chinese authorities are considering lifting the import ban on Australian coal propelled the Aussie dollar back to within reaching distance of 69 US cents, a key resistance level that has capped AUDUSD price action from September onwards.
The Kiwi’s stellar run versus the Aussie has ended, NZDAUD topping out a couple pips shy of 0.9550 on 16 December, aggressively pulling back from 12 month highs to start the new year near 0.9200.
The China re-opening path will be extremely bumpy, but provided President Xi does not backflip, the Australian dollar likely out-performs the New Zealand dollar throughout 1H.
Expectations are for the pair to feed back down through 0.9000 as the Australian economy delivers stronger growth relative to our local economy.
Having retreated over 3% from its 16 December peak, the net change for NZDAUD over the past few weeks has been one of the larger moves for the NZD (JPY price action aside).
Net changes against its other major peers have been modest.
When we published our final morning update (16/12) for the year, NZDUSD was trading in the 0.6330’s.....the Kiwi ended last week near 0.6350.
Against the pound, the Kiwi continues to trade either side of 0.5250 and looks primed to challenge key technical resistance at 0.5266 (61.8% Fibonacci retracement of the September to October drop) given the RBNZ’s relative hawkishness and the cloudy outlook for the UK economy.
Whilst NZDEUR delivered a larger range through the mid December to early January period, like the NZDGBP cross, the net change is marginal, closing last week in the 0.5960’s.
The ECB’s hawkish shift at its 15 December meeting drove NZDEUR below 0.5900 as Chief Lagarde informed the market that it as mis-pricing the ECB cycle – more rate hikes would be needed relative to market expectations
Improving eurozone data in addition to the astonishing reversal in natural gas prices (the price for benchmark Dutch natural gas futures is back to pre-covid levels) and mild winter temperatures have supported the shared currency during the holiday period.
We look for consolidative price action for NZDEUR through 1Q, ranging between 0.5850 and 0.6100.
The first week back delivered whipsawing price action for the Kiwi versus the US dollar, NZDUSD commencing the new year in the 0.6320’s, plunging to 62 US cents early in the week, recovering through 0.6350 mid-week before plunging again, heading into the final session of the week below 0.62.
Friday’s US session delivered another sharp bounce for the Kiwi as the first US jobs report for the year caused the US dollar to weaken and a sharp pullback for US bond yields.
Adding 223,000 jobs for December (versus 200K expected) in addition to the unemployment rate falling to a new cycle low at 3.5%, it was another solid US jobs report – the labour market continues to defy the Fed’s aggressive tightening.
The major talking point from the data was the average hourly earnings reading, December’s MoM rate printing at 0.3% versus an expected 0.4%. This accompanied major downward revisions to both headline jobs growth and wages, delivering a goldilocks report.
Slowing wages growth feeds into the hope that the Fed will further slow the pace of rate hikes, perhaps oping for a 25bps hike (to a target rate of 4.50% - 4.75%) at its 01 February meeting.
Current market pricing assigns a 75/25 split between a 25bps/50bps hike.
US equites logged their best day since November on hopes that the Fed can engineer a fabled soft landing – the Nasdaq climbing close to 3%, whilst the S&P 500 added 2.28%.
Looking to the week ahead, the aforementioned US CPI report is the major event.
Locally we receive ANZ-Roy Morgan consumer confidence (TUES.), building permits (WED.), both unlikely to influence NZD price action.
It’s a busy week for both Chinese and Aussie data releases, the former delivering CPI, PPI and trade balance data whilst the new monthly CPI report, retail sales and trade balance is reported across the Tasman.
Other data points that may capture the markets attention include Tokyo inflation numbers (given recent BoJ developments) and the preliminary reading of the University of Michigan consumer confidence survey.
It’s a quiet week for UK and EU data releases.
Given lighter holiday volumes and last week’s whipsawing, we’re yet to get a clear signal for the Kiwi’s near term directional bias.
Price action appears to be consolidating above the widely followed 200 day moving average, a sign that NZDUSD may be building momentum to re-challenge 65 US cents.
Although January seasonals favour USD strength and softer performance for US equities, suggesting the Kiwi may struggle to trade through the psychologically important 65 US cents mark.
Expectations are for a 0.62 to 0.64 range to prevail.
Daily exchange rates
Select chart tabs
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.