By Stuart Talman, XE currency strategist
Risk sentiment continues to lean negative as the market re-assesses the near-term path for Fed policy ahead of a key speech from Fed Chair, Jerome Powell.
Following on from Friday’s super-strong US jobs report, the set-up feels similar to the lead into last week’s FOMC meeting – expectations are that Powell will deliver a hawkish message, firing a warning shot to the market that the Fed has more work to do to reign in multi-decade high inflation.
He attempted to deliver this message following the Fed’s eighth hike, however the market ultimately interpreted Powell’s comments as less market-friendly – the Fed is nearing the end of its historically aggressive tightening cycle and likely to pause following another one or two hikes.
US stocks extended higher, risk sensitive currencies including the New Zealand and Australian dollars benefitted.
Then the employment numbers changed everything.
A monstrous beat for jobs growth and the unemployment rate falling to its lowest level since 1969 is not an outcome that is conducive to a further easing of inflationary pressures to the Fed’s 2% target.
Speaking at the Economic Club in Washington, a re-do is expected from Powell.
The shockingly strong January jobs report arms Powell with the ammunition to fire back against the market’s complacency and recent easing in financial conditions.
Will Powell step up the hawkish rhetoric?
This is the key questions for the market this week.
The US economic calendar is light so near-term direction is likely to take its cues from Powell and other Fed officials speaking this week.
Having fallen to 0.6270 during the early hours of Tuesday morning, the New Zealand dollar was on the improve throughout Wednesday’s local session, ascending back through 0.6340 as the Reserve Bank of Australia delivered a widely expected 25bps hike.
The key takeaways from yesterday’s RBA decision:
- RBA hikes 25bps to 3.35%
- Projects year-end inflation at 4.75%
- Signals more rate hikes required
Viewed as a somewhat hawkish update from the RBA, the Kiwi was dragged higher by the Aussie immediately following the decision and statement, before re-testing support at 0.6270 heading into US trade.
In its statement the RBA commented……
"The Board expects that further increases in interest rates will be needed over the months ahead …” but chose to exclude the phrase “not on a pre-set course” that had been included in the December statement.
The inclusion of this phrase implied that an upcoming pause may be required, however this now looks unlikely given the recent run of upside CPI surprises.
Expectations are now for the RBA to hike by 25bps in March and April, lifting the cash rate to 3.85%.
The Kiwi had been trading around 0.9150 against the Aussie immediately prior to the monetary policy update, before plunging a couple of pips below 0.91 in the hour that followed. It’s the lowest the antipodean pair has traded since mid-November with further downside likely given price action has consolidated below the 200-day moving average over the past week.
Looking to the day ahead, it’s a quiet one for macroeconomic data releases. Powell’s speech will be the key driver for markets, likely setting the tone for the remainder of the week. Other central bank officials from both the Fed and the ECB are also speaking.
US President Biden will give his State of the Union address to Congress this afternoon (1500) which could be a market mover if Biden chooses to address the China Spy balloon incursion. US-Sino relations are rapidly deteriorating and have the potential to negatively impact risk assets should balloon-gate tensions escalate.
We were calling for a lower Kiwi following last week’s FOMC decision, based on the assumption that Jay Powell would kick back against current market conditions. Whilst this didn’t play out as expected, NZDUSD ultimately headed lower following the white-hot jobs report.
We’ll stick with our call for a hawkish Powell, taking the opportunity to deliver a more decisively hawkish message in a couple of hours…..Kiwi to extend further below 63 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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