By Stuart Talman, XE currency strategist
The pendulum of risk sentiment swung back to positive during Friday’s action following two days of pronounced selling. US equities shrugged off the week’s bad data, propelled higher by a tech stocks and market friendly Fed-speak from Fed governor, Christopher Waller.
Having dipped below 0.6370 during the early hours of Friday morning, the New Zealand dollar pared losses throughout the local session and into the European afternoon, steadily ascending back into the 0.6430’s.
Easing back closet to 0.64 as US trade commenced, the Kiwi’s pace of gains accelerated through the New York morning surging to within a few pips of 0.6470.
Both stronger-than-expected Netflix subscriber numbers and news that Google parent Alphabet Inc. was cutting around 12,000 jobs fuelled an week-end rally for US stocks, the Nasdaq leading the three major US indices higher, gaining close to 3% for the session.
US equities had fallen the previous two sessions, weaker than expected consumer spending and manufacturing data reminding market participants that a soft(ish) landing may be a pipedream – the US economy may be headed for a deeper, uglier recession than what is currently expected.
Those who believe the Fed can engineer a mild recession point to the strength of the labour market and relative strength of household budgets, however there are signs that the Fed historically aggressive tightening cycle I starting to meaningfully impact both the labour market and consumer spending.
Google joins other mega-cap tech peers including Amazon and Microsoft in announcing large layoffs, company officials citing economic uncertainty and fears of a recession as the catalysts for their jon-cutting decisions.
Those who believe that a deep protracted recession is the base case cite the jobs market’s characteristically lagged response to monetary policy tightening. Credit sensitive parts of the economy, such as housing, are the first to be impacted by higher rates, whilst the unemployment rate climbs later in the cycle when the terminal rate has been reached.
If the tech behemoths are representative of the broader market, expect a swathe of lay-offs in the months ahead.
We wrote following Wednesday’s and Thursday’s sessions that the week was shaping up as a major reversal for US equities and other risk sensitive assets, supporting evidence provided via the S&P 500 failing to remain above 4000 and the Kiwi forming a gravestone reversal, aggressively rejecting territory north of 65 US cents.
Friday’s risk rebound casts doubt regarding the major reversal thesis. Should the week ahead deliver more upside, this call is invalidated.
So, what to look out for in the week ahead?
US earnings season ramps up with Microsoft and Tesla among the big names reporting this week. US corporations are yet to show signs of significantly weaker demand and deteriorating margins, but these are unavoidable given the pace at which borrowing costs have risen over the past 9 months.
Major data releases for the week include PMIs for the US, eurozone, UK and 4Q GDP for the US.
Wednesday is a huge day regionally, delivering a CPI doubleheader across both sides of the Tasman – local headline CPI expected at 7.1% whilst 7.5% is expected for the Australian economy.
Expect heightened volatility for the antipodean cross.
Having retraced back to 0.9150 the week prior, NZDAUD peaked above 0.93 last week. We expect range bound trade to predominate in the weeks ahead.
The Bank of Canada is the first of the major central banks to announce a monetary policy update for 2023, expected to raise by 25bps to 4.50%.
The immediate focus for the Kiwi is if it can regain a foothold above 65 US cents and re-test last week’s high at 0.6530 – a bullish development that signals renewed upside momentum.
On the other hand, should price action tip over and consolidate below 63 US cents, 2023’s early risk rally has likely been extinguished as recession concerns become the overarching narrative.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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