By Stuart Talman, XE currency strategist
Friday’s offshore sessions brought more of the same – the market’s optimistic mood extending the upside for US equities while the New Zealand and Australian dollars ended the week within close proximity of recent highs.
Having commenced last week in the 0.6460’s the New Zealand dollar traded in a relatively tight weekly range, spiking through 0.6520 earlier in the week whilst finding a base in a support zone, located between 0.6440/60.
Logging a modest weekly gain around a third-of-a-percent, it’s the third consecutive week of gains for the Kiwi, dragged higher by rising US stocks which in turn have been propelled higher on the narrative that inflation will fall rapidly back down to the Fed’s 2% target whilst the US economy miraculously side-steps a recession.
Friday delivered another key reading of price pressures – US Core PCE, the Fed’s preferred inflation measure. Core personal consumption expenditure increased by an annualised 4.4% in December marking the smallest annual rise since October.
It’s the third consecutive month of lower PCE following September’s result of 5.2%. PCE peaked back in February at 5.3%.
This and other key US inflation readings, including CPI and PPI, have been trending lower in recent months, clear visible peaks in core inflation having formed within the past 6 months.
The tug of war between bulls and bears currently sees the bulls with the upper hand, driving US stocks through major technical resistance levels. The rate sensitive Nasdaq has been outperforming on the (premature) conclusion that inflation is no longer a problem.
The Nasdaq added 0.95% through Friday’s trade to log a weekly gain of 4.32%, closing out its fourth consecutive up week. The S&P500 and Dow also gaining for the week, up 2.47% and 1.81% respectively.
US earnings season for fourth quarter 2022 has been mixed, but at the aggregate a positive for the market – last week delivering a 33% rally for Tesla following both top and bottom line beats and a bullish outlook.
The earnings calendar really heats up this week, headlined by Thursday’s trio of mega-cap earnings reports - Amazon, Alphabet (Google) and Apple.
Whilst there have been signs that demand is slowing, as evidenced by Microsoft’s dour forecast for its cloud segment, the market is yet to deliver the en-masse earnings downgrade that had been predicted throughout 2022.
The puzzlingly rosy outlook and solid performance through January for global stocks is the major factor in propelling the pro-cyclical Kiwi and Aussie dollar’s higher, the latter being a stand-out performer in recent weeks.
Gaining over 2% for the week, it was daylight between the Australian dollar and its major peers on the G10 leader board, the Kiwi taking claiming second position with its ~0.30% gain.
Stronger-than-expected 4Q inflation was the major AUD storyline last week, solidifying bets for a 25bps hike from the RBA on 7 February.
Climbing earlier in the week near 0.93, the rate sensitive antipodean cross was the big mover, NZDAUD shedding over 1.50% to end the week in the low 0.91’s.
Aussie retail sales (TUES.) and local jobs numbers (WED.) are the headline trans-Tasman events that will impact the pair this week. Having staged big swings in either direction over the past months, we expect NZDAUD to enter a period of lower volatility as both the RBA and RBNZ near the end of their respective tightening cycles and the global growth backdrop for 2023 evolves.
It’s a pivotal week for offshore events, the Fed’s expected 25bps hike (to 4.50%-4.75) the major story.
Will Jerome Powell take the opportunity to kick-back against the pronounced easing of financial conditions?
This is the crucial question for the market, the answer likely delivering a binary outcome.....
A hawkish/stern Powell – the risk rally derails.....a dovish/measured Powell – the rally extends higher.
US jobs numbers on Friday, the week’s major macroeconomic data release.
A busy week for major central banks also delivers interest rate decisions from the ECB and BoE. Whilst both are expected to deliver 50bps hikes, the ECB is the more hawkish of the two, likely to follow with another 50bps in March.
The BoE, on the other hand, is nearing the end of its cycle.
Following the ECB’s hawkish tilt in December, the bar is now set high for further hawkish surprises......NZDEUR could clear 0.6000 in the week ahead.
Other market moving events for the week include the more widely followed ISM PMIs (relative to last week’s S&P PMIs) in the US, eurozone CPI and the aforementioned busy week for US earnings.
The hectic mix of central bank decisions and numerous tier 1 data releases (both domestic and offshore) ensures that we should see big moves and perhaps a major inflection point for the market.
We’re extremely sceptical – questioning the sustainability of the current risk rally that began in earnest back in October.
Perhaps this is the week that the bulls receive their reality check.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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