By Stuart Talman, XE currency strategist
The new week has started on a positive note, risk assets comfortably heading higher into tomorrow’s headline event – US CPI for January.
Despite light news flow and expectations that the market may slip into wait-and-see mode, US equities are logging solid gains whilst the pro-cyclical New Zealand and Australian dollars reside near the top of the G10 leader board.
Commencing the new week in the low 0.63’s and falling through 0.6290 during the first half of Asian trade, the Kiwi has been steadily bid throughout Monday, ascending back through 0.6360 as the US session commenced.
Following the 03 February US jobs report, NZDUSD plummeted from above 65 US cents to below 63 US cents as market participants re-assessed the near-term outlook for the Fed’s policy path amidst concerns that robust US macroeconomic data makes it harder to further step-down inflation.
New Zealand dollar price action has ranged between 0.6270 and 0.6390 over the past week, with a range breakout a likely occurrence should the latest reading on US consumer prices deviate from the consensus projections of an annualised core reading of 5.5%.
Core inflation (ex-food and energy) for the US economy peaked at 6.6% in September and has declined for three consecutive months, December’s number printing at 5.7%.
Economists and central bank watchers who are sceptical of the new year risk rally point to the expected challenges ahead – inflation will be much harder to drive lower through 5% to 3% then it has been to achieve this cycle’s current pullback.
They site the forces of de-globalisation and the full re-opening of China’s economy as two factors that may keep inflation stubbornly above central bank’s respective inflation targets.
Monday’s price action suggests the market is not concerned with a potential CPI upside beat…..however, should core CPI to match the December reading (5.7%), risk assets likely lurch to the downside.
Conversely, a 5.5% or lower reading would re-ignite January’s impressive rally which lifted the rate sensitive Nasdaq to its best start to a year in over 20 years…..in this scenario, the Kiwi likely reclaims territory north of 65 US cents.
Yesterday we flagged the near-term downside NZDUSD level of 0.6296 – the 23.6% Fibonacci retracement of the October to January rebound off cycle lows. Yesterday’s low, as were the previous three trading day’s lows, was near this Fib level. It’s a sign that the NZD bears currently do not have the conviction to initiate an extension of the payrolls induced sell-off.
On the topside, we’d need to see NZDUSD clear the 0.6500/40 resistance zone as confirmation that the risk rally has further to run in the short to medium term.
We feel the soft-landing narrative is dubious given the multitude of recessionary signals that seemed to be dismissed due to the labour market’s resiliency. History tells us that the unemployment rate reaches a prominent bottom before a recession occurs, whilst an inverted yield curve (US 10yr-3mth treasury yield spread) has a 100% success rate in predicting US recessions.
The current U.S. 10 Yr/3 M Spread’s inversion is greater than 100bps – an all-time record inversion.
However, the market will dismiss this and other recessionary warning signs in the wake of a soft CPI print.
Looking to the day ahead – what else will be in focus in addition to US inflation numbers?
The Asian session will deliver consumer confidence across the Tasman and the preliminary reading of GDP for Japan.
Back in December NZDJPY plummeted through 87.20 as the BoJ adjusted its ultra-accommodative yield curve control policy. The lack of hawkish follow through in addition to recent news that the incoming BoJ Governor, Kazuo Ueda is expected to maintain the dovish policy settings has pushed the pair over 6% higher over the past two months.
The Kiwi was a clear outperformer against the Yen during Monday’s trade, gaining around 1.70%, ascending back near 92.50.
Should risk sentiment remain positive following tomorrow evenings’ US CPI data, we look for NZDJPY to challenge the 200-day moving average, located near 93.00.
Locally we receive RBNZ inflation expectations for 1Q – will expectations continue to trend higher?
In the UK it’s a busy night as the latest employment report is released.
Having spiked through 0.53 a couple of weeks back, NZDGBP has settled back into the prevailing 0.5200/70 range that has contained much of the past 6 weeks price action. If the market can get through this week unscathed, we look for the pair to mount another challenge to 0.53 resistance.
The preliminary read on eurozone 4Q GDP also on investors radars for Tuesday’s action.
It would surprise if we woke up tomorrow morning and markets have not significantly deviated from current levels.
An upside CPI beat is likely to have a more pronounced directional impact on US equites and other risk sensitive assets relative to a downside miss given the prevalence of the disinflationary trade through the first half of 1Q.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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