By Stuart Talman, XE currency strategist
A sharp fall in the Uni of Michigan consumer sentiment survey was the headline story to come out of Friday’s US session, plummeting to a six-month low (57.7 vs 63.5, the month prior) amid concerns about the debt ceiling impasse and more broadly, the trajectory of the US economy.
The three major US equity indices were trading comfortably in positive territory through the early stages of the week’s final session but were firmly offered following the survey release which also delivered a noted uptick in 5-year inflation expectations.
Whilst year-ahead inflation expectation eased (from 4.6% to 4.5%), the five-year look ahead increased to 3.2% (from 3.0%), its highest level since 2011.
Why does this matter?
If workers expect higher inflation in the years ahead, they will demand higher wages. In turn, businesses will raise prices…..fuelling a wage-price spiral.
Already under pressure through the local and European sessions, the New Zealand dollar’s decline extended through US trade, logging an intraday loss of over 1.70%, the standout laggard on the G10 leaderboard. The Australian dollar was the second weakest, shedding around 0.85%.
Why was the magnitude of the Kiwi’s sell-off significantly larger relative to its non-USD major peers?
Friday’s local session saw the release of the RBNZ’s inflation expectations survey for the June quarter. Unlike the Uni of Michigan survey, the poll of local business managers reported that two-year inflation expectations had eased to 2.79% from 3.30%, back within the RBNZ’s 1%-3% target range.
It’s the first sub-3% reading since 2021.
Whilst this does not mean the RBNZ’s job is done, given inflation remains at worryingly elevated levels, it is encouraging news.
The RBNZ is widely expected to lift the OCR by 25bps to 5.00% on 24 May.
Struggling to regain a foothold above 63 US cents during the Asian morning, NZDUSD selling pressure intensified following the release of the RBNZ’s survey.
Closing the week below 62 US cents, the Kiwi’s two-day peak to trough sell-off exceeded 3%, extinguishing NZD bulls’ hope for a topside breakout through 64 US cents.
The 05 April and 11 May highs have now formed a prominent double top in the 0.6380’s, ensuring that price action remains firmly entrenched in the prevailing 0.6100 – 0.6385 three-month range.
For the week, the New Zealand dollar logged a -1.60% decline against the dollar, its largest down week since early January. Only the Swedish Krone logged a larger weekly loss, down close to 2%.
The Kiwi logged a marginal weekly loss versus its trans-Tasman peer, with price action suggesting NZDAUD may struggle to reclaim 0.94. The 05 April and 11 May highs have formed a double top in the 0.9430/40 region….Friday’s close occurring within a few pips of 0.9300.
We think there is scope for the RBA to be the relatively more hawkish of the antipodean central banks in the months ahead given house prices in Australia have not only stabilised but recently logged modest gains, population growth is on the rise and last week’s Federal Budget includes initiatives that could fuel inflation.
Expectations for NZDAUD trajectory through the reminder of 2Q – feeding back down towards 0.90.
Looking to the week ahead, given it’s a relatively light one for tier 1 data releases, the debt ceiling saga will likely capture the most attention. To date, congressional leaders have made zero progress ahead of a projected “X-date” in the first or second week of June.
If Republicans and Democrats fail to make progress this week, we’ll likely see US equities struggle….and perhaps a weaker dollar. Whilst the Kiwi may outperform the US dollar (should the USD fail to attract safe-haven flows), it likely struggles on the crosses amidst a deterioration in risk sentiment.
Data points/releases of note for the week include RBA minutes, US retail sales, GDP for the eurozone and Japan and Aussie jobs numbers.
Last week threatened to deliver a topside breakout for the Kiwi.
Following a two-day hammering, what are the odds of a downside breakout below 0.61, this week?
We think the odds are low given the debt ceiling impasse likely weighs on the dollar….NZDUD to reman entrenched in its 0.6100 – 0.6300 range.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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