By Stuart Talman, XE currency strategist
Low volatility, directionless trade has been the dominant motif in recent weeks as markets struggle to find a clear short-term directional bias. A lack of tier-one, market moving data out of the US, this week, likely maintains choppy conditions.
The first two days of this week have delivered tight ~50 pip ranges for the New Zealand dollar, oscillating around the midpoint of the 0.6100 – 0.6300 range that has contained much of the past 9 weeks price action.
The Kiwi had threatened to breakout above 63 US cents late last week, but aggressively rejected the move on rising US bond yields as rates markets price in a higher probability the Fed hikes by 25bps at the 03 May FOMC meeting.
Bond yields are mixed through Tuesday’s trade, the short end of the curve (US-2yr) adding modest gains whilst yields in the belly and long end ease.
The dollar has logged modest broad-based losses against its G10 peers.
The British pound claims second spot on the G10 leaderboard, gaining around half-a-percent against the dollar and flat against the Kiwi.
UK jobs numbers were released, delivering an unwelcome upside surprise in wage growth. The result adds weight to the case for the Bank of England to add further tightening, market pricing now assigning an 80%+ probability the policy rate is lifted to 4.50% on 11 May.
This evening’s CPI release for the UK economy will likely be the deciding factor for the BoE. An in-line (9.8% YoY expected) or upside beat locks in the quarter point hike whilst a downside miss requires more debate from Governor Bailey and his MPC colleagues.
The pound has been one of the strongest performing currencies this year, gaining close to 3% against the dollar and around 5% versus the Kiwi. Tuesday has brought a muted response to the UK data, NZDGBP remaining below 0.5000, near last week’s 6-month low near 0.4970.
Four prominent lows have been marked in the 0.4870 to 0.4970 region over the past three years – the technicals therefore suggest GBP outperformance is nearing an end as the BoE concludes its tightening cycle.
If IMF forecasts prove correct, the pound will be one of the worst performing currencies over the next 12 months.
IMF forecasts are notoriously inaccurate.
We expect NZDGBP to base somewhere in the 0.4920 – 0.4970 region.
UK jobs numbers aside, attention was also given to Tuesday’s release of activity data for the Chinese economy, including 1Q GDP, industrial production, and retail sales. GDP and retail sales easily surpassed expectations whilst industrial production fell below the consensus. Despite the downside miss it was the fastest pace in factory output for 5 months.
The hot GDP print was the main talking point - the Chinese economy advancing at an annualised 4.5% (vs 4% expected), up from the prior quarter’s result of 2.9%. It was the strongest pace of expansion since 1Q of 2022, amid efforts from Beijing to spur the post-pandemic recovery.
Given these impressive data points, suggesting China re-opening momentum is growing, its puzzling that the China-sensitive Australian and New Zealand dollars have not logged larger gains.
We take this as a sign that US dollar sentiment continues to improve following the banking sector induced sell-off.
Its another quiet day ahead for market moving events.
UK CPI is the headline macroeconomic data event – headline inflation for the UK economy expected to print below double-digits for the first time since August.
Central bank speakers continue to share their thoughts on the state-of-play and the near-term outlook for monetary policy.
The Fed’s Bostic (dove) and Bullard (hawk) both non-voters were speaking overnight, echoing Christopher Waller’s (voter) comments from Friday – inflation is still too high, another hike is required ahead of a pause to assess the lag effects of 500bps of hikes.
Expectations for the near-term path for the Kiwi?
Sideways….tight ranges.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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