By Stuart Talman, XE currency strategist
The markets mood has soured through Wednesday’s sessions, US equities under pressure due to Microsoft delivering a bleak sales warning as it released 4Q earnings after Tuesday’s closing bell.
Staging an impressive two-day rally across Friday’s and Monday’s sessions, the S&P500 is struggling to maintain a foothold above the widely followed 200 day moving average whilst retreating from a declining trendline that has provided stout resistance on multiple occasions over the past 12 months.
Should price action continue to ease lower through the rest of this week and into what will likely be a pivotal week, next week, there is a strong case based on both fundamentals and technicals that argues the new year risk rally has run its course.
The fundamentals revolve around earnings downgrades and dour forecasts of compressed margins and slowing demand as the macroeconomic data flow continues to indicate falling activity levels
Microsoft warned that growth in its lucrative cloud business could stall, fuelling concerns that demand shocks will impact the broader market as the Fed’s tightening cycle has more of an impact on slowing economic activity.
Tesla and IBM are the next two bellwethers to report, following Wednesday’s closing bell.
If US earnings continues to disappoint, its hard to see US equities and other risk sensitive assets extend January’s rally.
The New Zealand dollar has failed to maintain a foothold above 65 US cents flashing similar topside reversal signals as it did last week.....although these proved to be a false alarm.
Having spiked through 0.6525 during the local session, the Kiwi has been offered throughout European and US trade, retreating back to 0.6450.
The two major regional events for the week – 4Q CPI for the New Zealand and Australian economies were expected to deliver some antipodean gyrations.....it was the Aussie inflation data that ignited the fireworks.
Local CPI rose 1.4% in the December quarter, maintaining an annualised rate at 7.2% (vs 7.1%, expected) , just below the June quarter’s peak of 7.3%.
Importantly, the result was lower than the RBNZ’s forecast of 7.5%, prompting some market commentators and economists to dial back their OCR terminal rate projections, calling for 50bps hikes in February and March.
This would lift the OCR to 5.25%.....before yesterday’s CPI data, a terminal rate of 5.5% was the popular pick.
The Kiwi initially spiked higher, logging Wednesday’s high a pip or so above 0.6525, and short of last week’s high at 0.6530.
Price action is looking very toppy at these levels – it’s the third aggressive rejection of 0.65+ levels over the past 6 weeks. In addition, technical indicators are firmly in overbought territory, suggesting that January’s rally may soon be extinguished.
A few hours later, the action hotted up as CPI for the Australian economy came in a lot stronger than expected – quarterly inflation rising from an annualised 7.3% in 3Q to 7.8% for 4Q. The RBA’s preferred measure, the trimmed mean rose from 6.1% to 6.9% over the same period.
The largest contributors to the upside surprise were domestic holiday travel and accommodation, electricity and international holiday travel and accommodation.
Whilst some market talking heads have jumped to the conclusion that Australian now has a major inflation problem, others have more rationally pointed out that recent drivers of higher prices are seasonal.
Travel costs are expected to ease this year, and of course, the Christmas periods is one of heightened demand as people travel throughout the country and abroad to spend the festive season with family and friends.
From a policy perspective, expectations of a 25bps hike from the RBA on 07 February have firmed, market pricing predicting an 80% chance the cash rate will be lifted to 3.35%.
The Aussie ripped higher in response, climbing through 0.7120 against the dollar, its highest level since the 11 August peak, marked a few pips shy of 0.7140.
The Kiwi was trounced versus its trans-Tasman peer, pummelled from near 0.92 just prior to the AUS CPI print – NZDAUD logging Wednesday’s lows a couple of pips below 0.9120.
We think the immediate reaction and magnitude of the move may prove to be an overreaction given inflation in Australia noticeably moderates in the months ahead. In any event, we expect the Aussie to maintain mild outperformance versus the Kiwi in the short to medium term.
To the day ahead, the major data point is US 4Q GDP – economic growth for the US economy expected to ease from 3.2% to 2.6%. Should we receive a downside miss, US equities will continue to drop from upswing highs, dragging the Kiwi and Aussie dollars lower.
Its likely to be a very quiet local session with both the Chinese New year holiday and the Australia Day holiday.
Happy Australia Day to our friends and family across the ditch!
Expectations for Kiwi dollar price action – further consolidation below 65 US cents.
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.