By Stuart Talman, XE currency strategist
Risk assets have reversed some of Friday’s losses, trading with cautious optimism throughout the first trading day of the new week. News flow has been light, durable goods orders for the US economy the sole data point of note.
Durable goods orders, which measure the cost of orders received by manufacturers of goods meant to last at least three years, sank -4.5% (-4.0% expected) month-over-month in January, the most since April of 2020, and reversing from a downwardly revised 5.1% jump in December.
Following the data, US equities opened the new week on a stronger footing, perhaps breathing a sigh of relief that a key data point came in softer-than-expected following a slew of upside beats over the past few weeks.
Hot reads on the labour market, retail spending and key inflation reads – PPI and PCE (the Fed’s preferred inflation gauge), have shifted the narrative through the first two months of the year.
January delivered a fierce risk rally on soft landing bets, market participants piling into US equities, in particular growth stocks whilst pro-cyclical currencies such as the New Zealand and Australian dollars outperformed.
February has administered a heavy dose of reality, strong macro-economic data flow and signs of sticky inflation shifting the narrative from soft landing to higher-for-longer…..
Commencing the new week in the 0.6150’s, the New Zealand dollar has range traded between 0.6130 and 0.6180, both antipodeans noted underperformers amongst the G10 cohort.
The New Zealand and Australian dollars had benefitted from the China re-opening trade through late 2022 and into the new year, improving risk sentiment fuelled by a brighter global growth outlook driving the two China-sensitive currencies to six-month highs.
However, questions are now being raised as to how much of a positive impact China’s economy will have on global growth through 2023 and beyond, due in part to the deteriorating geo-political backdrop. Spy-balloons and intelligence suggesting that China is providing support to Russia, has further eroded Sino-US relations, creating another headwind for risk assets.
Tomorrow delivers important reads on the Chinese economy with the release of manufacturing and services PMIs. Later in the week, the measure of activity for smaller businesses, the Caixin Services PMI is also released.
In other news from Monday, 4Q retail sales for the local economy missed expectations, declining -0.6% (vs expected +1.5%). Whilst spending levels have remained at relatively healthy levels, the effects of inflation are clear – Kiwi households are having to spend more to buy a declining volume of goods and services.
The retail sales quarterly data in addition to other measures of household spending will be volatile in the months ahead as adverse weather conditions influence spending patterns.
Looking to the day ahead, locally we receive the latest ANZ business outlook survey. Not a market mover, but insightful, nonetheless.
Retail sales for the Australian economy is the headline regional event.
It’s another quiet day for offshore data releases, GDP out of Canada the sole tier 1 macro release.
Heading into the final third of US trade, US stocks are maintaining a foothold in positive territory, but are well off early session highs, showing a lack of conviction on behalf of the equity bulls. Up over 1% in the New York morning, the S&P500 is now up around half-a-percent.
The next key directional move for US equities is likely to be driven by the bond market.
It’s the third consecutive day that the yield on the US ten-year bond has climbed just shy of 3.98%, looking poised for a break-out above the psychologically important 4.00% mark.
This week’s ISM PMIs are likely to dictate the path for yields. Should Wednesday evening’s manufacturing PMI and Friday’s services PMI follow the current trend of upside data surprises, treasury yields will surely spike higher.
Given the services sector contributes significantly more to GDP, the services PMI will be the more closely scrutinised. It currently sits in expansionary territory whilst the manufacturing PMI has yielded contractionary readings for the past three months.
By many different measures, the US manufacturing sector is already firmly in recession.
Monday’s low for the Kiwi was logged a pip or so above 0.6130. Losses have been pared throughout the offshore sessions, NZDUSD commencing Tuesday’s local session near 0.6170.
Our key near-term level to monitor is 0.6146 – the 38.2% Fibonacci retracement of the October rebound. Should price action maintain a foothold above here to then extend higher through last week’s 0.6190 support, a short-term bottom materialises.
We’d need to see NZDUSD break through stout resistance near 0.6260 to shift the bias from down to consolidative.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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