By Stuart Talman, XE currency strategist
The market’s mood has brightened heading into the final session of the week, risk assets by expectations the debt dealing deal will clear its final hurdle, passing through the Senate. Risk-on flows have also been driven by prospects of a Fed “skip”, Jay Powell and his colleagues expected to keep rate on hold at the 14 June FOMC meeting with another hike to follow on 26 July should the incoming data warrant additional late-cycle tightening.
The megacap lead stock market rally has resumed, crude oil and most other commodities log strong gains, the Australian and New Zealand dollars occupy two of the top 3 positions on the G10 leaderboard amidst broad based US dollar weakness as US bond yields give back some of the past few week’s gains.
Late in Wednesday’s US session a likely co-ordinated effort to inform the market of the upcoming “skip” was executed. Fed vice-chair elect Philip Jefferson and Philadelphia Fed Governor, Patrick Harker made comments in favour of holding the policy rate steady at the next meeting to give the Fed more time to assess the incoming data before deciding on the extent of additional tightening, if required.
Following these comments, the Fed’s official, unofficial mouthpiece, the Wall Street Journal’s Nick Timiraos released an article titled, Fed Prepares to Skip June Rate Rise but Hike Later. Timiraos wrote:
Investors in recent days had expected the Fed would lift rates at its meeting June 13-14, prompting two policy makers Wednesday to publicly underscore their preference to forgo a hike, barring a sizzling jobs report on Friday. The strategy would give officials more time to study the economic effects of the Fed’s 10 consecutive prior rate rises, as well as recent banking stress, by spacing out further increases.
It’s a notable shift from recent hawkish Fed-speak in which multiple Fed officials flagged the need for further tightening due to persistently sticky inflation and the recent run of stronger-than-expected macroeconomic data.
What does the Fed now know that the market does not?
Perhaps we’re in for a shockingly weak US employment report, this evening.
The odds of the Fed Funds target rate being lifted to 5.25%-5.50% have ratcheted down, market pricing now assigning a circa 30% probability, down from ~70%, 48 hours earlier.
Basing at 0.5985 through Wednesday, the New Zealand dollar has rebounded over 1.50% from six-month lows, decisively reclaiming territory north of 65 US cents. Thursday’s high has been marked a few pips shy of 0.6080, the Kiwi logging an intraday gain of around three-quarters-of-a-percent.
Attention is given to 0.6025, the 50% Fibonacci retracement of the October to February upswing. Should this be tested and hold over the sessions ahead, we anticipate NZDUSD improving back to the 200-day moving average, currently located near 0.6150.
A soft ISM Manufacturing PMI has also presented as a dollar-weakener, the latest reading on industrial activity falling from 47.1 in April to 46.9 in May (47.0 expected). It was the seventh consecutive month of contractionary activity. Critically, the prices paid sub-gauge fell to its lowest level in 6 months missing the consensus estimate by a large amount (44.2 vs 52)…..encouraging news for the Fed.
Other data points of note for the US economy – ADP employment change surprised to the upside whilst weekly jobless claims delivered a downside miss, both indicative of a persistently strong US labour market.
Should we receive a strong set of jobs number this evening, Jefferson’s and Harker’s comments and Timiraos’ article would be rendered irrelevant.
The other major macroeconomic data point from Thursday was the release of eurozone CPI. Following on from weak national readings 24 hours earlier, the market was clearly expecting a downside miss for both the core (5.3% vs 5.5% expected) and headline (6.1% vs 6.3%) readings.
Whilst the CPI data is a welcome relief for the ECB, governing council members have been quick to remind the market that there is till much work to be done to return inflation to targeted levels.
The Kiwi is attempting to base against the euro following last week’s pummelling, NZDEUR close to 4% from the 0.5820’s to mark recent lows near 0.56. The pair marked overnight highs a few pips north of 0.5650.
Looking to the final session for the week, the main event is of course, the US employment report – headline jobs growth of 190K (down from 253K) and the unemployment rate climbing from 3.5% from 3.4%, the consensus projections.
We’re betting on a soft set of numbers given yesterday’s emphasis on a Fed skip….the Kiwi to log a second day of gains to end the week near 61 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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