By Stuart Talman, XE currency strategist
PMIs for the UK, eurozone and US have continued the recent run of stronger than expected activity data, ensuring it’s too premature for major central banks to consider halting their respective tightening cycles.
Upside PMI surprises, led by the services sectors, have been the driver for a fall in risk assets as market participants weigh resilient economic performance against prolonged higher cash rates…..soft landing hopes waning.
Having consolidated near recent highs over the past few weeks, US equities are breaking down, a third consecutive day of losses sending a clear message – the new year risk rally is done!
All three major indices are down around 2%, logging their largest daily declines since 15 December when both the Fed and ECB delivered their final rate hikes for 2022.
The risk-sensitive New Zealand dollar is one of the worst performing of the G10 currencies, falling around three-quarters of a percent, treading water above 62 US cents.
Yesterday we commented:
Should the yield on the benchmark US ten-year bond mount another challenge to the 4.00% mark (closed FRI. near 3.84%), which has not been breached since early November, NZDUSD likely extends further below 0.6190.
Bond yields in the US and other developed nations ripped higher through Tuesday’s offshore sessions, as investors continue to re-assess the path for near term central bank policy. The yield on the benchmark US ten-year bond came within a few pips of 4%. Breaking through key technical resistance near 3.90%, a further topside extension will fray the market’s nerves.
The US dollar likely to remain well supported in the short term, particularly given that we’re entering a quiet period for US data releases and events. Fed Chair Powell’s 07 March testimony is the next major risk event.
Failing to break through 0.6260 resistance, the Kiwi now looks set to again challenge key support at 0.6190. A break below likely opens a path to test the 38.2% Fibonacci retracement of the October-February rally, located at 0.6146.
The 50% Fib level is located at 0.6025.
It’s quite possible that we see a test of this level over the coming days, should we see a clear shift in sentiment towards US equities from a buy-the-dip to sell-the-rally mentality.
Expect the bear-market rally calls to be shouted from all corners of the market in the days ahead.
Tuesday’s standout performer amongst the majors was the British pound, the sole G10 to log gains against the dollar, GBPUSD climbing over 0.50%, bouncing off critical support at 1.2000.
The UK services sector delivered the biggest rebound relative to the US and eurozone economies, the services PMI rocketing back into expansionary territory, surpassing the consensus forecast by some distance (53.3 vs 48.3, exp.).
The latest reading signalled the fastest rate of private sector output expansion for eight months and raises doubts regarding a potential pause from the Bank of England at its 23 March meeting.
Falling over 1.20%, NZDGBP plunged to its lowest level since early November, marking this morning’s lows in the 0.5120’s.
We’ll be monitoring 0.5135 – the 38.2% Fib retracement of the September-October wash-out as this level provided robust support throughout November, the pair grinding higher in the months that followed.
Should NZDGBP rebound above here through the remainder of the week, we look for the pair to settle back into the 0.5135-0.5250 range that has contained most of the past four months price action.
Whilst both the services and manufacturing (highest in 7 months) PMIs were encouraging, the UK economy is still expected to be one of the weaker performers through 2023 and beyond.
In other news from Tuesday, the release of the minutes from the RBA’s February meeting have confirmed the board of Australia’s central bank is decidedly more hawkish than when the last met in December. A 50bps hike was in play for the February meeting, but not favoured due to the uncertain outlook.
Doubts over whether inflation has peaked and comments that Australia’s cash rate “was lower than policy rates in many other comparable economies”, firms bets for additional 25bps hikes at the March and April meetings, lifting the cash rate to 3.85%.
Today delivers an important data release for the RBA – the wage price index for the fourth quarter. Should annualised wage growth print above 3.5%, terminal rate expectations may edge closer to 4%.
The Kiwi has recovered some of Monday’s losses against the Aussie, NZDAUD bouncing off the 61.8% Fib retracement of the September-December upsurge, located at 0.9027. Logging overnight highs a few pips shy of 0.9080, it’s a big day ahead for the antipodean cross.
For an overview of today’s RBNZ interest rate decision, please refer to yesterday’s update.
The RBNZ widely expected to deliver a 50bps hike to 4.75%.
It’s a quiet night on the offshore macro calendar, with FOMC minutes at 0800 tomorrow morning the key offshore event over the next 24 hours.
Selling pressures are intensifying as bond yields extend higher and the disinflationary trade has vanished.
Expectations are for further NZD downside, the Kiwi to breach 0.6190 key support with a possible test of 0.6146 (38.2% Fib).
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Stuart Talman is Director of Sales at XE. You can contact him here.
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