By Stuart Talman, XE currency strategist
A mild reversal in risk sentiment has halted the four-day rally, US equities tracking lower as bank stocks continue to remain under pressure and jobs opening data signalled slowing US labour market demand.
The US dollar is weaker amidst falling US bond yields, the market holding the view that last week’s hike was the last of the Fed’s tightening cycle. Market pricing for an on-hold decision at the 03 May FOMC meeting is closer to a 60/40 call in favour of keeping the Fed Funds target rate at 4.75%-5.00%.
The New Zealand dollar has logged a modest gain through Tuesday, extending higher for a second day of gains, marking an overnight high at 0.6315.
We flagged 0.6311 as the next key upside hurdle for the Kiwi to clear, the 50% Fibonacci retracement of the 02 February high (0.6538) to the 08 March low (0.6084). Should price action establish a foothold above through the remainder or the week, NZD upside bias gains momentum.
Having met resistance at 0.6310 during Tuesday’s local session, the Kiwi fell back through 0.6280 heading into the New York morning, before springing higher following softer JOLTS jobs openings data for the US economy.
Whilst not a tier 1 data release, the JOLTS data has been getting significantly more airtime over the past six months, viewed as an important input into the Fed’s assessment of US labour market tightness and the need to keep hiking rates due to persistently strong labour demand.
The number of job openings in the US fell by 632,000 to 9.9 million (vs 10.4 million, expected) in February, its lowest level since May 2021. It’s a signal the labour market is starting to cool as Fed rate hikes filter through the economy.
It’s a busy week for jobs numbers – this evening delivers ADP Employment change whilst non-farm payrolls are released, Friday evening.
Interestingly, US yields and the dollar fell immediately following the JOLTS release. Prior to regional banking turmoil, softer jobs data would have been celebrated as it raised hopes the Fed could slow the pace of rate hikes: bad data was good data.
We’ve likely entered a period where bad data is simply viewed as bad data, given heightened concerns the US economy will not achieve a soft landing.
Against its major peers, the Kiwi is mixed losing around a third-of-a-percent against the JPY and EUR and just shy of half-a-percent against the GBP. The Kiwi has been a noted outperformer against its trans-Tasman peer, NZDAUD climbing around three-quarters-of-a-percent.
The headline event from Tuesday was the RBA’s interest rate decision, a line ball decision given polled economists were roughly split between another 25bps hike or a pause. The RBA favoured the latter, maintaining the cash rate at 3.60%.
Holding a monetary policy meeting every month, except January, the RBA meets more frequently than its major central bank peers, allowing it to pause more easily to assess the cumulative effect of tightening or easing.
Following on from soft monthly CPI and retail sales prints, the RBA commented in the accompanying statement:
There is further evidence that the combination of higher interest rates, cost of living pressures and a decline in housing prices is leading to a substantial slowing in household spending.
However, despite the pause, the RBA may not be done, further rate hikes may be required. Inflation remains far too high and with the unemployment rate at 50-year lows, the jobs market is still historically tight.
The key upcoming data point for the RBA – quarterly CPI, released 26 April. A hotter than expected inflation report would put 25bps back on the table for the May meeting.
The monetary policy sensitive antipodean cross ripped higher following the on-hold decision, NZDAUD spiking from 0.9280 to 0.9320 in the 30 minutes that followed before climbing steadily throughout European and US trade. Early morning highs were marked through 0.9350.
Heading into today’s RBNZ interest rate decision, the Kiwi looks primed to break through 0.9360 resistance should the RBNZ avoid a dovish hike. A 25bps hike is unanimously expected, lifting the cash rate to 5.00%. The focus will be on the accompanying statement and Governor Orr’s presser.
Market pricing and the RBNZ’s forward guidance are aligned, calling for a 5.50% terminal rate.
If the RBNZ signal they are close to being done, raising doubts that an additional 50bps of tightening will be required, NZDAUD may fail to punch through 0.9360 resistance.
RBA dovishness has been priced into the antipodean cross, whilst the bar has been set high for a hawkish surprise from the RBNZ…..we feel this mix caps further NZDAUD upside in the medium term.
Other market moving events for Wednesday include ADP Employment change and ISM Services PMI – both critical readings regarding the state of the US economy. Unlike the manufacturing PMI, services activity remains robust, comfortably in expansionary territory.
The Kiwi has been unable to deliver a strong upside surge over the past six weeks, grinding higher through March and early April amongst choppy price action. Only once over the past 6 weeks has NZDUSD logged a three-day rally.
We lean towards a dovish hike from the RBNZ, perhaps following the RBA’s lead by signalling an upcoming pause. In turn, the Kiwi to pull back below 63 US cents, falling into the upper bound of the past 6 weeks range.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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