The disinflation trade loses momentum, risk assets continue to pullback. Tech rally stalls – Nasdaq logs first losing week since late December. The market’s next big test this week – January US CPI

By Stuart Talman, XE currency strategist

Following the blow-out US jobs report the Friday before last, risk assets have had a rethink, pulling back from recent prominent highs as a chorus of Fed speakers throughout the past week reinforced the need to keep rates higher for longer.

Having peaked a couple of pips shy of 0.6540 the day before the hot 03 February payrolls data, the New Zealand dollar could not rebound from the data-induced plunge, logging a modest weekly decline of around a quarter-of-a-percent, closing the week just above 63 US cents.

Leading into the final local session of the week, the Kiwi had caught a bid, logging early Friday morning highs near 0.6390, however risk assets traded with caution throughout the Asian and offshore sessions, ensuring that risk assets enter the new week on a relatively fragile footing following January’s impressive gains.

Rates markets have staged an important re-pricing over the past week, hawkishly shifting to factor in a further two interest rate hikes from the Federal Reserve – terminal rate expectations now sitting close to 5.20% having camped below 5% earlier in the month.

This has halted the rate sensitive Nasdaq’s advance, ending the streak of consecutive weekly gains that marked the first five weeks of the new year. The tech index logged a weekly decline of -2.41%, yet remains up over 12%, year-to-date.

The S&P500 also had its worst week since late December, shedding over 1% whilst the Dow logged a marginal loss for the week.

Following on from the first FOMC meeting and US employment report for the year, US stocks and other risk sensitive assets will face their next big test this week – US CPI, released during Tuesday’s offshore session.

Core inflation for January is expected to print at a consensus 0.4% MoM for an annualised rate of 5.3%, down from 5.7%. Simply, if CPI undershoots expectations, the disinflation trade resumes with gusto – risk assets rebound from last week’s pullback.

Should we receive a hot CPI report on the heels of the white-hot jobs numbers, risk sentiment will abruptly deteriorate, quite possibly opening up a path for a prolonged swing to the downside.

Other data points of note for the week ahead include UK jobs and inflation numbers, eurozone and Japanese GDP, US retail sales and across the Tasman, the jobs report for January.

Locally, it’s a quiet week, the economic calendar devoid of any tier 1 macroeconomic data releases.

The near term NZDUSD level to monitor is 0.6296 – the 23.6% Fibonacci retracement of the October to January rebound. Located a few pips below here is the 200-day moving average – the Kiwi has not closed below this widely followed technical indicator since late November.

Should we receive a stronger-than-expected CPI result in the early hours of Wednesday morning, we likely see the Kiwi extend to the 38.2% Fib level, located at 0.6146.

Of course, there is a far-less dramatic scenario whereby CPI meets expectations, potentially resulting in range bound trade as the disinflation/soft landing trade competes with the yield curve inversion/other recessionary red flags trade.

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