By Stuart Talman, XE currency strategist
The new year risk rally continued through Friday, the three major US equity indices overcoming early session declines, rallying forcefully through the New York afternoon to close the week firmly in the green.
The Nasdaq lead the way, advancing 0.71% to end the week up close to 5%. Logging a sixth consecutive day of gains, it’s the longest winning streak for tech stocks since November 2021. The S&P 500 (weekly gain of 2.67%) and Dow (weekly gain of 2.00%) delivered smaller gains, up 0.40% and 0.33% respectively.
The New Zealand dollar continues in its attempts to establish a foothold above 64 US cents having traded up through 0.6410 on multiple occasions following Thursday’s in-line US CPI data, reporting further moderation for consumer prices. The Kiwi’s downside was once again halted near 0.6340 during Friday’s US session, a level that provided robust resistance throughout last week.
Ending the week in the 0.6380’s, NZDUSD logged a modest weekly gain of 0.66% whilst the Japanese yen continued its hot streak once again sitting atop the G10 leader board, adding 3.21% for the week.
Adding 1.52% for the week, AUDUSD marked weekly highs in the 0.6990’s, setting up an important test of 70 US cents in the week ahead. The Aussie last traded through this key psychological level in late August.
AUD outperformance against the NZD has been one of the storylines for currency markets through the festive season and early January trading as almost 50% of the Kiwi’s late September to mid-December outperformance has been rapidly unwound. Greater support for the Aussie has occurred on broad based positive risk sentiment in addition to the improving outlook for China’s growth following the abrupt end to covid-zero and the Chinese authorities stepping back from policies that had negatively impacted the tech and property sectors.
Logging four of five down days last week, NZDAUD marked Friday’s lows a couple of pips below 0.9150, over 4% off the 16 December peak near 0.9550. Further downside is likely whilst the market’s mood remains buoyant with a re-test of 0.9000 a possibility during January. The pronounced swings that have punctuated NZDAUD price action from late September should give way to smaller ranges as both the RBNZ and RBA conclude their respective tightening cycles through the first half of 2023.
Given the RBNZ’s more aggressive path, likely to push the OCR into the mid 5%’s (RBA expected to hike to ~3.85%), in addition to Australia’s broader portfolio of exportable commodities – the Australian economy will likely outperform the local economy through 2023, ensuring a relatively stronger Aussie dollar.
Back to the broader market, the narrative that has been driving sentiment to start 2023 has been inflation moderation and the hope that the US and other major economies can avoid deep, protracted recessions. Last week’s US CPI report for December provided further evidence that price pressures continue to pullback from 40+ year highs, increasing the likelihood that the Federal Reserve will again step-down the pace of tightening, having raised the target rate by 75bps in November and 50bps in December.
Importantly, inflation expectations are also declining – Friday’s Uni of Michigan Consumer Sentiment 1-year inflation expectations gauge falling for the fourth consecutive month. In addition, the headline reading of sentiment reached its highest level since April.
The Uni. Of Mich survey was the catalyst for Friday’s late session rally, ensuring a strong end to a bullish leaning week.
Given the orderly slow-down in macro-economic data and a still robust labour market, sentiment has remained positive on the hope that if the US economy slips into recession, it will be a mild contraction. Risk assets have been clearing important technical resistance levels in recent sessions, a prominent example being the S&P 500 peeking through 4000 and closing above its 200 day moving average.
The S&P 500 had briefly traded above the widely followed 200d MA in December and further back in March, but has not consistently sustained price action above since the 18 months from June 2020 to its record high in January 2022.
Equity market bulls will be emboldened should the week ahead deliver further upside – price action consolidating above 4000 and the 200d MA could fuel another leg higher through 1Q.
Given their correlation to US equities, the New Zealand and Australian dollars would benefit.....look for further near term upside.
What should we be keeping an eye on in the week ahead?
The World Economic Forum is held in the Swiss ski resort of Davos this week, world leaders, policy makers and corporate executives addressing a number of key concerns that pose threats to economic growth, political stability and the climate.
In the US, retail sales and earnings reports will be the focus.
GDP, industrial production and retail sales for China is released tomorrow whilst Aussie employment numbers drop on Thursday.
In the UK the latest labour market data and retail sales could influence GBP direction whilst ECB minutes is the key eurozone event.
The Bank of Japan’s meeting is the major central bank event, although no further policy tweaks are expected following on from December’s widening of the yield target to 0.50%
It’s a quiet week on the local calendar.
Expectations are for the bullish vibes to continue, the New Zealand dollar looks well positioned to extend higher through 64 US cents this week.
It’s likely to be a subdued start to the week given the Martin Luther King Day holiday in the US, Monday to deliver tight ranges.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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