By Stuart Talman, XE currency strategist
Fragile risk sentiment has punctuated price action through Thursday’s sessions - US equities trade with a downside bias, bond yields are lower, the dollar is notably higher against the pro-cyclicals and commodities are lower across the entire complex.
Falling over 1%, the New Zealand dollar has failed to break through major technical resistance in the 0.6380’s, logging Thursday’s high at 0.6385 during the Asian morning. Selling momentum quickened heading into the European session, NZDUSD falling to 0.6330 absent a clear catalyst.
Despite recent gains for risk assets, the market’s mood remains edgy as the debt ceiling impasses and ongoing banking sector concerns prevent a topside breakout of prevailing ranges.
Weekly jobless claims and producer prices (PPI) data were the two data points of note. The number of Americans filing for unemployment benefits rose to its highest level since October, signalling further cooling of the US labour market as the Fed’s most aggressive tightening cycle in over 40 years constitutes to slow the broader economy.
Whilst last week’s US employment report represented still robust jobs growth, the non-farm payrolls data point is a lagging indicator. The weekly initial jobless claims data is regarded as an important leading indicator of the state of the US labour market. A sustained rising four-week average in initial claims inevitably results in a tick-up in the unemployment rate.
Following the release of the claims data and softer than expected PPI, risk assets, including the New Zealand dollar lurched lower, NZDUSD falling from north of 0.6360 to mark the overnight low a pip or so below 0.6290.
The strong rejection of 0.6380 resistance suggests an exhaustion of the Kiwi’s rally that commenced during the last week of April, climbing close to 4.5% from the low 0.61’s.
Push-pull dynamics continue.
The Fed has signalled that its tightening cycle will be paused…..the market is calling for circa 75bps of cuts through the back end of the year.
This is dollar negative.
However ongoing recession and global growth concerns weighs on risk sensitive currencies, including the New Zealand and Australian dollars.
Despite another chapter of debt-ceiling impasse concerns and ongoing turbulence in the US regional bank sector, the dollar retains its safe-haven status.
This is dollar positive.
However ongoing recession and global growth concerns weighs on risk sensitive currencies, including the New Zealand and Australian dollars.
Despite another chapter of debt-ceiling impasse concerns and ongoing turbulence in the US regional bank sector, the dollar retains its safe-haven status.
This is dollar positive.
These offsetting influences ensures price action remains within the prevailing ranges that evolved from late February.
The headline event from Thursday was the Bank of England’s monetary policy meeting, as widely expected, the BoE lifted the policy rate by 25bps. The key takeaways:
- BoE raises policy rate by 25bps to 4.50%
- 7-2 vote in favour of 0.25% (same split as previous meeting)
- Keeps options open for additional tightening
On the last point, another hike is possible should inflation data surprise to the upside, however like its major central bank peers, the BoE is also close pausing the cycle.
Service sector inflation is tipping over whilst the recent spike in inflation was largely attributable to volatile food prices…..there are now good reasons to think UK inflation will meaningfully recede in the months ahead.
The pound initially rallied against the dollar, but has reversed course through US trade, falling close to 1% as risk sentiment leans negative.
Logging an overnight high a pip or so through 0.5050, NZDGBP continues to rebound from 14 month lows. Following a prolonged swing low from February through late April, we expect range bound trade to be the order of play through the remainder of 2Q.
Expectations are for a 0.4950 to 0.5100 range as we head into the second half of 2023.
Looking to the day ahead, the UK remains in focus with the release of 1Q GDP figures, the UK economy projected to grow at measly annualised rate of 0.2% through the March quarter.
It’s a quiet economic calendar for the final trading day of the week, Uni of Michigan Consumer Sentiment the only other release of note.
Will the Kiwi remain above 63 US cents to mount another re-test of 0.6380 resistance?
Should buying momentum evaporate, driving NZDUSD back towards 0.62 – the mid-point of the 0.61-0.63 range that has captured the bulk of the price action over the past 12 weeks, we’re back to normal programming – range bound, neutral trade.
The 100-day moving average is locate near 0.6280.
If NZDUSD fails to remain above in the days ahead, 0.6380 remains our prominent double top for the time being.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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