US equities pullback from highs, trading with caution ahead of big events. Australian retail sales & China PMIs the focus during today's Asian session

By Stuart Talman, XE currency strategist

Markets have traded with caution to start what is expected to the be a pivotal week, most risk-sensitive assets logging modest declines in tight ranges. Multiple central bank decisions, a host of tier 1 macroeconomic data and mega-cap tech earning results should determine the markets next key directional move.

Will the risk rally commence another leg higher or will the bears wrestle back control?

US equities have started the week pulling back from recent highs, but any dip through January has been met with vigorous buying, the equity market bulls propelling US stocks higher on the view that the Fed’s tightening cycle is nearing an end, inflation is receding, and the US economy is strong enough to avoid an ugly recession. 

Tech stocks have been leading the market higher, the Nasdaq’s 10%+ gain for January its best start to a year in over 20 years. This despite Microsoft’s bleak demand forecast, chipmaker Intel’s horrendous earnings miss and news of substantial tech sector layoffs.

Meta, Amazon, Apple and Alphabet (Google) all report in a busy week for US corporate earnings. If these bellwethers deliver more warning signs regarding the demand outlook, the tech rally may well be done.

Given its tight correlation with US equities, this would also halt the New Zealand dollar’s attempts to establish a foothold above 65 US cents.

Opening the new week a few pips shy of 0.6450, the Kiwi has continued to track sideways, price action contracting in an increasingly tighter range as the previous week progressed.

Over the past two trading days NZDUSD has largely traded between 0.6460 and 0.6500 with a few short lived spikes through 0.65.

Typically, this type of subdued price action is the precursor to an aggressive range breakout.

The Kiwi also range trades against most of its major peers, the Aussie dollar an exception – NZDAUD nosediving to a 2.5 month low near 0.91 last week on the back of a hot 4Q AUS CPI report.

The Kiwi has clawed back some ground to start this week, Monday’s highs marked in the 0.9170’s.

December retail sales for the Australian economy is the region’s major data point for Tuesday. Household spending in November was a lot stronger than expected, driven by heightened activity in the “Black Friday” and “Cyber Monday” sales. Of course, inflation played a role, higher prices contributing to higher nominal retail sales.

Another hot print today adds to the narrative that Australian households are weathering higher borrowing costs, adding to the case for the RBA to follow through with another 25bps hike in March and April following next week’s widely anticipated 25bps hike to 3.35%.

Should this be the story of today, expect NZDAUD to track back towards last week’s lows near 0.91.

Other data points of note for Tuesday include China’s PMIs and the 4Q Employment cost index for the US economy.

Having peaked in 1Q 2022, wage pressures in the US have been receding over the past two quarters. US equities likely respond favourably should this trend continue given it is an important component of the broader view on inflation.

The second half of this week is when the action really starts to hot-up, so perhaps we continue to see mellow price action until Thursday morning (Fed rate decision and ISM Manufacturing PMI).

The past three days of trading has formed lower daily highs and lower daily lows for NZDUSD, signalling that both the bulls and bears remain uncommitted until the next major market development dictates the next major directional move.

It would be astonishing if this does not occur later this week.

Stuart Talman is Director of Sales at XE. You can contact him here.