By Stuart Talman, XE currency strategist
The notable market development from Wednesday was that of rising global bond yields following the bank of Canada joining the Reserve Bank of Australia in delivering a surprise quarter point rate hike. US bond yields and the dollar firmed whilst the rate sensitive Nasdaq index logged one of its largest intraday declines of the past few months.
Thursday has unwound most of Wednesday’s price action.
The dollar is weak across the board as US bond yields pullback from 2-week highs. Tech stocks are leading the broader market higher, most commodities are stronger, the New Zealand dollar ascends back into a 0.6090-6110 resistance zone that has capped upside on multiple occasions over the past few weeks.
The catalyst – weaker than expected weekly initial jobless claims data.
Applications for jobless support rose to their highest level in 20 months, indicative of emerging softness in the US labour market. Following on from last week’s mixed employment report which reported strong headline jobs growth but a rising unemployment rate (3.4% to 3.7%), initial jobless claims printed at 261K (235K expected), up from 233K the month prior.
It was the largest increase since July 2021.
Whilst the labour market remains resilient in the face of 500bps of Fed tightening, there are signs that it is starting to cool. The weekly claims data (both initial and continuing), unlike the more prominent monthly non-farm payrolls (NFP) report, is a leading indicator and therefore regarded by many as a more accurate reading of labour market conditions.
If weekly claims data are rising at an increasing pace, this will typically translate into a falling NFP, rising unemployment rate.
Labour market strength and persistently high core inflation has caused the Fed and other central banks concern as they attempt to return inflation to targeted levels. Whilst central bank officials will never explicitly state it, their desire is to soften demand by cooling the jobs market – a rising unemployment rate is a necessary evil.
The spike in weekly claims data will be welcomed by Jay Powell and his FOMC colleagues.
The implied probability of a Fed rate hike at next Thursday’s FOMC meeting continues to ease, Fed funds futures now assigning around a 1-in-4 chance of the target rate being lifted to 5.25%-5.50%.
Marking Wednesdays lows a pip or so above 0.6030, the new Zealand dollar has recouped the previous 24 hours losses, bid throughout the Asian afternoon before pulling back from 0.6080 to 0.6060 ahead of the claims data.
Spiking higher immediately following release, the Kiwi has logged an overnight high within a pip or so of 61 US cents.
It’s the third attempt this week to establish a foothold above 0.61, NZDUSD looking to recover some of the large declines that occurred following the RBNZ’s dovish 25bps hike on 24 May which sent the Kiwi plummeting from north of 0.6250 through 0.6100.
Should NZDUSD extend through 0.61, the next key resistance zone is located between 0.6138 and 0.6150, containing both the 38.2% Fibonacci retracement of the 11 May to 31 May sell-off and the widely monitored 200-day moving average.
With a multitude of volatility inducing events next week, including US CPI on Tuesday evening and the Fed rate decision early Thursday morning, we’re likely to see key directional moves, the Kiwi to confirm if sub-0.60 levels will re-emerge, or price action returns to the 0.6100 – 0.6380 range of the past few months.
In other news from Thursday’s sessions, softer-than-expected GDP data has tipped the eurozone economy into recession. The consensus estimate called for a flat quarter-on-quarter reading, however activity unexpectedly contracted by -0.1% for the March quarter. Figures for the final quarter of 2022 were also revised to report a similar -0.1% decline, thereby meeting the text-book definition of a technical recession – two consecutive quarters of declining growth.
Although, given the marginal QoQ declines in addition to the strength of the eurozone labour market, many analysts would be quick to comment that a real recession is yet to occur.
The Kiwi has logged a modest against the euro, maintaining range-bound trade between the low 0.56’s and 0.5690 over the past few weeks, following the RBNZ-induced sell-off. Marking Thursday’s high at 0.5670 before easing back through 0.5650, we’d need to see NZDEUR improve back through 0.58 to shift the directional bias from neutral to bullish.
Looking to the day ahead, it may well be a one of subdued price action given a lack of market moving events and market participants shying away from directional calls ahead of next week’s pivotal events.
Expectations are for NZDUSD to close 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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