By Stuart Talman, XE currency strategist
Limited progress regarding the debt ceiling negotiations has raised the market’s apprehension levels through Tuesday. Despite both Biden and House Speaker McCarthy labelling Monday’s talks as productive, congressional leaders appear to be no closer to a deal as the inevitable politicking extends the timeline to a deal being inked.
Risk assets are trading to the downside – the S&P500 and Nasdaq’s losses are not sizeable, but in this low volatility environment, they’re approaching the largest intra-day loss during the past month. Intraday losses in the days ahead will steepen the closer we get to the US government’s X-date without the debt limit being lifted.
The New Zealand dollar has shed around a half-of-a-percent, failing to maintain a foothold above the 100-day moving average. Peaking a few pips above 63 US cents during yesterday’s local session, the Kiwi was offered throughout the Asian afternoon and well into the European session before finding support in the 0.6230’s.
Yesterday’s tiny range day formed an “inside bar”, a pattern that forms when the daily range trades within the previous day’s high-low range. An inside bar represents indecision – bulls are not willing to drive the price of the asset higher, whilst bears lack the conviction to drive the price below the previous day’s low.
Given Tuesday’s price action has broken to the downside, both the inside bar pattern and failure at the 100-day moving average tentatively signal further downside is ahead. Further confirmation is required to validate – a break below current trendline support and Friday’s low, located near 0.6220 would add weight to the downside case.
A decisive break below the 12 May low near 0.6180 very likely sets up a re-test of the lower bound of the prevailing three-month range near 61 US cents.
Today’s RBNZ interest rate decision will likely cause short term volatility given another surprise 50bps hike cannot be ruled out in addition to expectations that the projected OCR track will be lifted closer to 6%.
Yesterday was PMI day, S&P Global releasing the latest flash readings of manufacturing and services activity for the UK, eurozone and US economies.
The divergence between the two sectors has been a common theme amongst the three major economies…..the divergence widening in May.
Manufacturing PMIs for the UK, eurozone and US all printed weaker-than-expected, falling further into contractionary territory. The eurozone reading signalled the sharpest contraction in the factory sector in three years, whilst the UK’s decline was the steepest in five months.
It’s a different story in the services sectors, activity remaining resilient despite one of the most aggressive synchronised central bank tightening cycles in history designed to significantly cool consumer spending. Of concern, the prices sub-gauge in each respective PMI remains at elevated levels.
Central bank officials continue to worry about core services inflation.
The S&P PMIs for the US are best described as a non-event, regarded as unreliable. The more widely followed Institute for Supply Management’s (ISM) PMIs are the benchmark indices.
A big day ahead!
Locally we receive 1Q retail sales, released at 1045. Four of the past five quarters have reported a QoQ decline in retail sales, a trend that is projected to continue for the March quarter.
The headline event is the RBNZ’s interest rate decision, statement, and Governor Orr’s presser an hour later. The bar is set very high for a hawkish surprise which would come in the form of a 50bps hike and lifting the projected OCR track.
The consensus pick is for 25bps, raising the cash rate to 5.50%, its highest level since late 2008. The language in the statement likely to signal the RBNZ maintains its tightening bias.
UK CPI is the major offshore data release, headline inflation expected to log a large fall from 10.1% to 8.2% as due to base effects of higher energy prices. An inline or softer number adds weight to the case for a BoE pause at its 22 June meeting.
We continue to favour further downside for the Kiwi in the sessions ahead, provided the RBNZ is not ultra-aggressive. Heightened tension around the debt ceiling deal will weigh on risk assets…..NZDUSD to test 62 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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