By Stuart Talman, XE currency strategist
US treasury yields continue to push higher against the backdrop of hawkish central bank rhetoric and inflation data surprising to the upside. This, in turn supports a USD the keeps griding higher as Fed terminal rate expectations reach 5.50%.
The strongest performer amongst the G10 yesterday, the New Zealand dollar sits at the bottom of the leader board for Thursday, failing to break through key resistance at 0.6270. Ending three days of gains, NZDUSD is again under pressure, trying to remain above critical support at 0.6190.
Overnight lows have been marked a pip or so below 62 US cents.
Despite the challenging risk backdrop, US equities have initiated a rebound through the New York afternoon all three major indices climbing back into positive territory after opening materially lower. The S&P 500 and Nasdaq are up around a third-of-a-percent heading into the final two hours of trade having been down ~0.6% and ~0.9% at early session lows.
February has delivered a steady grind lower for US stocks as market participants re-price expectations for the Fed’s hiking cycle through 1H and beyond, adding a further 50bps to the terminal rate whilst pricing out 2H rate cuts…..the 2023 Fed pivot narrative has vanished.
Hopes that the central banks of developed economies were winning the inflation battle have wavered over the past month as key inflation reading across the globe suggest that the more heavy lifting is required to initiate the next leg of receding consumer prices.
Overnight, we received the latest reading of eurozone inflation, continuing the trend of hotter than expected data prints. Headline inflation for February printed at 8.5% (8.2% expected), falling for the fourth consecutive month, having peaked at 10.6% in October.
However, its core inflation that is causing headaches for the major central banks.
Stripping out food and (declining) energy prices eurozone core inflation for February was at 5.6% (5.3% expected), marking the third month of rising core inflation and a new peak for the cycle.
This is not what the ECB and their central bank peers hoped for, ensuring that policy rates must keep heading north. Terminal rate expectations for the ECB’s primary policy rate are now north of 4%.
On the positive side, central bank officials have been referencing forward looking indicators signalling that price pressures should start to ease……however inflation is notoriously hard to predict, particularly when Covid has been the catalyst for fundamental changes in the global economy.
Despite hot core inflation, the EUR has underperformed through Thursday. The Kiwi has logged daily losses against the USD, AUD, JPY and GBP, whilst achieving modest gains against the EUR.
Stronger PMI data out of China has been the catalyst for the Kiwi’s recovery from Tuesday’s weekly lows, NZDEUR ripping higher from 0.5785 to touch important resistance at 0.5880 at yesterday’s highs. The pair must break up through 0.5880, descending trendline resistance and mount a challenge to 0.5907, the 50% Fibonacci retracement of the October – December rally….to shift the downside bias back to consolidatory.
The eurozone’s fortunes changed dramatically through the fourth quarter of 2022 as the evolving energy crisis dissipated, aided by mother nature delivering a mild winter; and China’s abandonment of Covid-zero. Like the NZD, the EUR is one of the more sensitive currencies to the China growth story.
The Kiwi’s path against the euro in the short to medium term will be dictated primarily by global risk sentiment. Should risk assets continue to head south amidst sticky inflation worries, the NZD underperforms the EUR…..the October cycle low at 0.57 could be in for a re-test.
Shifting our focus back to the upcoming 24 hours, the headline event is the ISM Services PMI release for the US economy. Jerome Powell and his FOMC colleagues have stated that they are closely monitoring the services/ex-housing component of the inflation backdrop.
Should we receive a stronger than expected (54.5) services PMI this evening, the sticky inflation and higher for longer narrative will continue to exert downside pressure on US equity markets, and pro-cyclicals including the New Zealand and Australian dollars.
Six of the past 8 monthly services PMI releases have delivered upside beats.
Yesterday we wrote:
We’re not convinced the Kiwi can add to its two-day rally and look for NZDUSD resistance at 0.6270 to hold.
This resistance level has firmly rejected NZDUSD upside momentum, increasing the likelihood the Kiwi ends the week below 62 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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