By Stuart Talman, XE currency strategist
With an RBNZ rate decision, RBA Governor Lowe speech, and multiple market moving US data points on the docket, it promised to be an eventful 24 hours.
Markets are jittery.
US bond yields are lower, whilst safe haven flows boost both the USD and the JPY. US equities track lower for a second day whilst the New Zealand dollar struggles to cling onto a rare three-day rally.
We’ll start in chronological order and move forward through Wednesday’s action.
We commented in a recent morning update that the bar was set high for a hawkish RBNZ surprise……Governor Orr and his committee members leapt right over it.
Widely expected to deliver a 25bps hike, the RBNZ surprised all and sundry with a 50bps hike. The key takeaways:
- RBNZ hikes by 50bps to 5.25%
- RBNZ lifts estimates of cyclone rebuild inflationary impact
- RBNZ still concerned about persistently high inflation
It was a shock decision as 20 of 22 (Bloomberg) polled economists predicted the RBNZ would raise the cash rate by a quarter-percent.
The RBNZ commented in the accompanying statement of monetary policy:
The Committee agreed that a further increase in the OCR is needed at this meeting to ensure core inflation and inflation expectations begin to fall...a 50 basis point increase in the OCR was seen as helping to maintain the current lending rates faced by businesses and households, while also supporting an increase in retail deposit rates.
Regarding inflation, the statement included:
Near-term inflationary pressures have increased, boosted by short-term price pressures resulting from recent severe weather events and reflected in business survey indicators of costs and pricing intentions.
The RBNZ is therefore clearly still worried about the pain that persistently high inflation will inflict on households, businesses, and the broader economy and that the cyclone rebuild may apply upward pressure to inflationary forces.
Expectations for the terminal rate remain at 5.50%, suggesting the RBNZ has one more 0.25% hike before ending the cycle should inflation and labour market tightness ease.
Trading near 63 US cents prior to the decision, the Kiwi immediately ripped higher in the 2 minutes that followed, spiking to a high a pip or so shy of 0.6380, its highest level since mid-February.
Paring gains through the Asian afternoon, NZDUSD found support around 0.6340 before being offered throughout European trade. Heading into the North American session, the Kiwi had given up its RBNZ-induced gains and more, logging an overnight low at 0.6285.
Barely clinging on to an intraday gain, outside of the JPY and USD, the New Zealand dollar is the sole G10 currency in the green.
The Kiwi’s largest gains have occurred against the Aussie.
Following on from the RBA’s on-hold decision, Tuesday, the RBNZ’s assessment of the near-term path for inflation puts it at odds with the Australian central bank that believes falling prices affords it the luxury to pause, potentially ending its tightening cycle.
This policy divergence has catapulted NZDAUD from 0.9270 to 0.9440 over the past 48 hours, smashing through stout 0.9360 resistance that had capped price action over the past few weeks.
As the RBNZ and other central banks near the end of their tightening cycles, the focus will shift from rate hikes to economic performance – how rapidly will activity deteriorate, warranting a shift from hikes to pauses to cuts?
Given the RBNZ have been more aggressive than the RBA, the probability of a local recession is significantly higher relative to the Australian economy. With a cash rate likely to end up close to 2% higher than the RBA’s, some commentators believe the RBNZ has overreached.
If this proves correct, the Kiwi will enter a period of underperformance against the Aussie.
We’ll be monitoring price action in the coming days to assess if this view influences NZDAUD levels sooner rather than later.
Marking Wednesday’s high a couple of pips north of 0.9440, the antipodean cross has pulled back below 0.9400, forming a short term double top at the peaks.
Turning our attention to offshore action, the two major data points from Wednesday’s US session were ADP Employment change and the ISM Services PMI.
Private businesses in the US added 145,000 jobs (vs 200K, expected) in March, down from an upwardly revised 261,000 the month prior. Following on from Tuesday’s soft JOLTS job openings data, the ADP data point provides further evidence of a cooling US labour market.
US equity markets gapped lower on open, market participants seemingly worried that weaker than expected US data is increasing the likelihood of a hard landing for the US economy. Late last year and during the new year period, softer data was celebrated as good news given it lowered expectations for Fed rate hikes.
Now, bad data is simply bad data.
And more was received via the ISM Services PMI, which had been printing at robust levels over the past 12 months.
Aside from December’s puzzlingly sub-50 print, March’s 51.2 (vs 54.5, expected) the result was the lowest since May 2020. Demand and employment is noticeably cooling, suggesting that Fed rate hikes are finally starting to impact the service sector. Encouragingly, price pressures continue to ease.
Its precisely what the Fed is hoping to achieve.
A rapid cooling of the US economy and necessary recession required to rein in inflation.
US bond yields continue to fall, the yield on the benchmark US ten-year logging a fifth consecutive day of declines, marking fresh 6-month lows through 3.27%. In early March, the 10-yr yield had climbed back through 4% as the market moved to consider a potential Fed Funds rate near 6% amidst strong macroeconomic data flow.
A month later, the market prices in circa 100bps of rate cuts to the end of 2024, calling for a Fed pivot as the US economy falls into recession.
This should be a US dollar negative story, but as we’ve seen through Wednesday’s sessions, the dollar attracts safe-haven flows when pessimism spikes.
The S&P500 has shed around half-a-percent whilst the Nasdaq’s losses comfortably exceed one percent. Against a risk negative backdrop, the Kiwi has range traded mostly between 0.6300 and 0.6330 during US trade.
Looking to the day ahead, AUS trade balance, Caixin Services PMI and Canadian jobs numbers are the data points of note.
It may prove to be a quiet 24 hours as the market slips into wait-and-see mode ahead of the pivotal US employment report (non-farm payrolls) on Friday evening.
Yesterday we called for a dovish 25bps hike from the RBNZ and the Kiwi pulling back below 63 US cents.
We were half right.
The Kiwi’s aggressive spike higher followed by a sell-off to log fresh intraday lows presents a false breakout scenario. False breakout patterns are one of the more important technical trading patterns, often a reliable signal that price action is marking a strong directional reversal…..in this case NZDUSD heading lower.
We’re not going to back the signal until we receive the pivotal US jobs numbers. Should these ratchet up recession concerns, driving safe-haven flows to the dollar, we shift our call back to a short term neutral bias.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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