By Stuart Talman, XE currency strategist
Risk assets have lurched lower overnight as Fed Chair Jerome Powell’s first day of testimony has sent a clear message – inflation is still a huge problem; the Fed will keep hiking rates. Unlike his February FOMC presser, which sent the wrong dovish message, there was no mention of disinflation, instead Powell had this to say in his prepared remarks:
"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."
Back in early February, US equities and other risk assets were propelled higher by the Fed stepping down to a 25bps increment and Powell’s FOMC presser in which he referenced colling inflation multiple times, commenting that the time was right for the Fed to slow the pace of tightening.
The major US equity indices climbed to year-to-date highs as did the New Zealand dollar, ascending to within couple of pips of 0.6540.
Now, the market has moved to consider the likelihood of a more aggressive Fed, rates markets now assigning close to a 50% probability that Jay Powell delivers a 50bps hike at the 22 March FOMC meeting.
That’s bad news for US stocks, particularly rate sensitive tech stocks which had been rallying through late 2022 and into the new year on the narrative that a less aggressive Fed was nearing the end of the tightening cycle and given the recent run of strong macroeconomic data, Powell and his colleagues could deliver a miraculous soft landing.
The narrative has flipped again.
Having bounced off the 200-day moving average to stage an impressive two-day rally to end last week, the S&P500 has tipped over, shedding around 1%. Although, given Powell’s hawkish rhetoric it’s a little surprising that US stocks have not come under more intense selling pressure, the rate sensitive Nasdaq down only around half-a-percent.
The explanation – following on from the run of hot macro data and recent Fed-speak, the market was expecting a hawkish Powell.
Falling around 1%, the New Zealand dollar has marked fresh year-to-date lows through 0.6110, its lowest level since late November. Compared to its G10 peers, the Kiwi is holding up much better against the dollar’s strength. The Scandies (NOK & SEK) are down over 2% whilst the Aussie’s losses are just shy of 2%, magnified by a dovish RBA earlier in the day.
The question now – will US equities, the Kiwi and other risk sensitive assets extend lower, or will buyers re-enter on the view that the selling is overdone?
We’ll likely receive that answer during Friday’s overnight session following the release of US jobs numbers for February.
A hot headline non-farm payrolls number like we received last month will further raise the probability of the Fed moving by half-a-percent later in the month.
Risk assets continue their swing lower.
An in-line or moderately softer than expected jobs growth number – we may see a healthy bounce.
The other major event from Tuesday – the RBA’s interest rate decision delivered the widely expected 25bps hike, the key points:
- RBA lifts cash rate by 25bps to 3.60%
- RBA acknowledges inflation slowdown
- Tweaks language to imply upcoming pause
Given the recent run of softer data across (monthly) CPI, jobs, wages and household spending, the RBA tweaked the language in its statement, commenting:
“The Board expects that further tightening of monetary policy will be needed to ensure inflation returns to target ….”
Versus February’s statement:
“The Board expects that further increases in interest rates will be needed over the months ahead …”
The market interpreted this as RBA dovishness, the shift in language implying that Governor Lowe and his colleagues are nearing the end of the tightening cycle following 10 consecutive hikes.
In response, the Kiwi ripped higher against the Aussie, climbing from near 0.92 prior to the decision/statement, to log overnight high through 0.93, coming to within a few pips of the 19 January high at 0.9309.
Gains have been pared following Powell’s testimony, NZDAUD pulling back into the 0.9270’s.
The critical near-term resistance level for the antipodean cross is 0.9285 – the 50% Fibonacci retracement of the December-February sell-off. Should NZDAUD consolidate above here and push higher through the 19 January high, the upside bias remains.
Looking to the day ahead, it’s a busy one full of potential market moving events.
Regionally, the headline event is a speech from RBA Governor Lowe. The base case now calls for the RBA to hike one more time at the April meeting, followed by a pause. Lowe’s words will be monitored for any clues to confirm the base case.
Eurozone GDP, ADP employment change (US) and the Bank of Canada’s interest rate decision are the major offshore events.
The ADP number will likely be the key factor to determine short-term direction. If jobs growth easily exceeds the consensus forecast of 200k, risk assets continue to be sold…..a weak ADP number may spur buy-the-dip action.
Tuesday’s sell-off has driven the Kiwi below 0.6146, the 38.2% Fib retracement of the October-February rebound. We would need to see price action climb back through here to tentatively signal downside exhaustion.
Below, 0.6060 is a critical support level to monitor. A break below here and we could be in for an aggressive downside washout.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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