Risk sentiment negative as market participants await debt-ceiling progress. Weak activity data out China adds to the underwhelming re-opening story. AUD underperforms

By Stuart Talman, XE currency strategist

Markets have traded in tight ranges through Tuesday, the clock keeps ticking as US congress attempts to agree on a framework to overcome the debt ceiling impasse. Time is running out given Biden’s trip to Japan (WED.) to attend the G7 meeting and upcoming recesses for both the Senate and the House ahead of the early June “X-date.”

House speaker Kevin McCarthy commented that a deal will need to be agreed before the weekend to have a realistic chance to pass through both houses. Failure to do so would push the US government one step closer to default.

Although default is an extremely improbable outcome, financial market volatility will spike if a lack of progress is made before Biden boards his flight.

The market’s mood through Tuesday has shifted back to risk-off – The S&P500 and Dow trade in negative territory with a couple of hours of US trade remaining. Industrial metals and most energy markets trade in the red, commodity linked currencies the laggards.

The New Zealand dollar logs a marginal gain of less than a quarter-of-a-percent, constrained in a ~40pip intraday range.

Yesterday, we flagged 0.6248 as the key near-term technical hurdle for NZDUSD to overcome. Representing the 50% Fibonacci retracement of the three week bounce off the late April lows, price action has peeked above here on multiple occasions over the past 24hours, but has failed to extend meaningfully higher, finding resistance at 0.6260.

Weaker than expected activity data out of China provided the catalyst for the Kiwi to be offered throughout the Asian afternoon, falling from near 0.6250 through 0.6230.

Industrial production for the world’s second largest economy did climb from a year-on-year reading of 3.9% in March to 5.6% in April, however fell short of the forecast of 10.9%, indicative of a re-opening that is not progressing as vigorously as expected.

The weaker-than expected factory data suggests a sluggish start to China’s export season, in turn raising concerns over the global growth outlook.

Retail sales followed a similar path, climbing from the month prior (10.9% YoY to 18.4%) but falling short of the forecast (21.9%). Despite the softer than expected result for April, consumer spending is expected to spike through May given the May-day holiday earlier in the month.

Recent macroeconomic data our of China has not impressed, representative of re-opening momentum that has fallen short of expectations.

This is a headwind for China sensitive currencies including the New Zealand and Australian dollars, the latter typically hit the hardest when the China newsflow is negative.

Having swiftly rejected last week’s high near 0.9430, NZDAUD plunged through 0.93 during the first trading day of the week. The Aussie’s underperformance through Tuesday has lifted the antipodean cross back through 0.9350, despite the release of RBA meeting minutes which flagged the potential for further near-term rate hikes.

In other news from Tuesday, cooler UK jobs data adds to the case for the BoE to pause its hiking cycle at its next meeting on June 22.

A spike in wages growth for the month prior was likely an important factor for the BoE to hike the policy rate by 25bpts to 4.50%, however following a moderation in wages for April, this looks to have been an outlier.

The Kiwi’s circa 3% bounce of 14-month lows versus the pound faltered near 0.5050 last week, before finding support near 0.4960. We suspect the 27 April low a few pips above 0.49 will prove to be a prominent cycle low, however refrain from calling a sustained run higher for NZDGBP.

Expectations are for a 0.4950 to 0.5100 range to trade as we head into the second half of the year.

Looking to the day ahead, debt ceiling headlines are likely to be the predominant influencer of near-term direction. Should a lack of progress be the story, expect material risk-off flows. The Kiwi will struggle against the dollar with larger losses occurring against the crosses, particularly versus the Japanese yen.

Constructive talks would facilitate a move higher for risk sensitive assets, however not to the same magnitude as a potential downside move.

The week’s deluge of central bank speakers continues, following seven Fed officials speaking through Tuesday. Nothing new to report, the messaging remains the same.

During local hours, GDP for Japan and the wage price index data point across the Tasman are the two major releases, the latter an important input for the RBA’s decision-making process. Stronger than expected wages growth raises the probability of another 25bps hike at the RBA’s June 6 meeting.

It’s a quiet night for offshore data releases.

We favour debt-ceiling drama – negative newsflow reporting the impasse continues…..the Kiwi to fall back below 62 US cents.

Stuart Talman is Director of Sales at XE. You can contact him here.