By Stuart Talman, XE currency strategist
Price action continues to trade in prevailing ranges as the market awaits the next key directional cue to either extend the early-2023 risk rally or shift the market’s positive mood.
The New Zealand dollar is the strongest amongst its G10 peers, ascending through the 0.6410/30 resistance zone that had capped price action over the past week, overnight highs logged a couple of pips shy of 0.6440.
The release of activity data for China was the major event for yesterday’s local session – GDP, industrial production and retail sales all surprising to the upside further adding to the positivity regarding China’s progress towards a full re-opening.
Whilst retail sales declined for the third straight month, the 1.8% YoY decline was a big improvement on the prior months -5.9% result and much better than the expected result of -8.6%.
The Chinese economy expanded 2.9% YoY easing from the 3.9% growth of 3Q but was also above the consensus expectation of 1.8%.
The data feeds into one of this year’s major storylines – China’s abandonment of Covid-zero and restrictive market policies will spark resurgent demand throughout the economy. The increased freedom of movement of the past 5 weeks has already started to positively impact activity levels.
The New Zealand and Australian dollars will be primary beneficiaries of this narrative as demand for the antipodean’s exportable commodities rebounds.
Grinding higher over the past 10 days, the Kiwi looks to be setting up to test the 13 December high at 0.6514.
The other major data series from Tuesday, UK jobs, also delivered a positive outcome, reporting that the labour market remains resilient despite the BoE’s 340bps of tightening through 2022.
It’s a common theme across developed economies – unemployment rates are yet to tick higher despite higher borrowing costs.
At some point, the jobs data, which are lagging indicators and do take time to respond to changes in monetary policy, will start to materially deteriorate, informing the market as to the contours of the global recession.
With the unemployment rate remaining near all-time lows and persistent wages growth, the BoE likely delivers another 50bps hike at its 02 February meeting, lifting the policy rate to 4.00%.
The Kiwi continues to range trade against the pound, recovering from 0.5215 to 0.5240 through offshore trade. NZDGBP price action largely contained between 0.5170 and 0.5270 since late November. A break above 0.5270 is required to shift to a more bullish near-term outlook for the pair.
A lack of US data for Tuesday is resulting in a subdued session – the S&P 500 and Nasdaq logging modest losses whilst the Dow is down around 1% on a softer than expected earnings report from Goldman Sachs.
To the day ahead the major week’s major event – the Bank of Japan monetary policy meeting may deliver huge moves for the Yen and peripheral assets.
For years, the BoJ has run with static, ultra-easy monetary policy settings, but following on from December’s surprise tweak to its yield curve control policy (YCC), widening the target yield on the 10year JGB from 25bps to 50bps, a new era of policy normalisation is expected.
Market commentators and economists are divided in their calls for today’s outcome – some calling for a total abandonment of YCC, others calling for a further widening of the yield target.
Given BoJ Governor Kuroda will be stepping aside, the yet to be announced new governor commencing his or her term in April, some are calling for no change to policy settings.
It’s a little strange that no follow up would occur to December’s change, particularly given the heightened dysfunction within the JGB market, exacerbated by YCC.
Should today deliver the end of YCC or a wider target, expectations are for NZDJPY to take another rapid leg lower, potentially trading sub-80.00. No change may drive the pair back to 84.00.
A full economic calendar also delivers UK CPI, the latest update on eurozone inflation, US retail sales and the Fed’s Beige Book (a survey of current economic conditions).
Trend is your friend – an expression that has stood the test of time for traders. We look for the Kiwi to maintain its upside bias, consolidating above 64 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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