US stocks log modest losses but Nasdaq extends winning streak to 8th week. Not too hot, not too cold data-flow & Fed expectations drive key stocks higher

By Stuart Talman, XE currency strategist

Despite a modest pullback for the three major US equity indices through Friday, sentiment remains buoyant, risk assets enjoying a productive week on the view that the global economy may be headed towards a somewhat soft landing and the Fed is no longer the most aggressive of the major central banks.

Having ripped higher during Thursday's overnight session, catapulted higher from 0.6160 to 0.6240 on weak US data, the New Zealand dollar consolidated the past week's gains, mostly ranging between 0.6210 and 0.6240 through Friday's sessions.

Logging a weekly gain of +1.88%, the Kiwi sat in the top half of the G10 leaderboard, outgained by the AUD (+1.97%), NOK (+1.98%), and GBP (+2.04%).

The week delivered important upside technical developments, NZDUSD trading trough the 200-day moving average (0.6150) to close the week above the 100-day moving average (0.6120), signalling the NZD bulls are well in control.

The Kiwi eneded the week near 0.6130, an important level as it coincides with the 61.8% Fibonacci retracement of the May sell-off. Should price action extend the rally through here during the first half of this week, expectations rise for a re-test of 63 US cents, a stout level of resistance that has capped the Kiwi's advance on multiple occasions over the past few months.

Will the Kiwi continue to rally?

The answer lies, in part, with US stocks.

Logging an 8th consecutive week-on-week gain, the Nasdaq is enjoying its best winning streak since March 2019. The tech-heavy index gained +3.25% for the week. Climbing +2.58% (weekly gain), the S&P500's weekly streak stretches to 5-straight, its best run since November 2021. It was the largest weekly advance for the indices since the week commencing March 27.

Year-to-date the Nasdaq is up over 33%, the S&P 500, just shy of 20%.

Is there more gas in the tank for US stocks, or will the AI induced bubble burst?

The answer lies with the macroeconomic data flow and what the Fed does and says at its 26 July FOMC meeting having paused the tightening cycle last week after 10 consecutive interest rate hikes.

Recent readings on the state of the US economy have printed in the goldilocks zone - not too hot to stoke fears of a more aggressive Fed and not too cold to create alarm the US economy is headed for an ugly recession.

CPI reports and US jobs numbers will shape the Fed's late cycle path.

Should inflation remain persistently above the Fed's 2% target whilst unemployment continues to track around 4%, Jerome Powell and his FOMC colleagues will put their dot-plots into action, lifting the Fed funds target rate closer to 6%.

It was clear from the reaction to last week's interest rate decision, the accompanying statement/dot-plots and Powell's presser - the market does not believe the Fed……the base case calls for one more hike, then stick a fork it in - the tightening cycle is done.

A run of stronger than expected data required to align the market and the Fed…..in turn ending the impressive year-to-date run for US stocks.

Against the other majors, the Kiwi logged its largest weekly gain against the yen, NZDJPY climbing +3.70%. As expected, the BoJ refrained from adjusting current policy settings at Friday's monetary policy meeting and provided no hints that any changes would be made at its July meeting.

The JPY has also struggled in recent weeks as global yields have tracked higher, delivering 8-year highs for NZDJPY through 88.00, Friday's high marked at 88.55.

Against the GBP and AUD, the Kiwi logged a marginal loss (-0.14%) for the week and versus the EUR and marginal gain (+0.7%).

Looking to the week ahead, it’s a relatively quiet week that starts with the Juneteenth holiday in the US.

Fed Chair Powell's testimony (WED. + THURS.) is the major event on the US calendar whilst the Bank of England's interest rate decision and CPI ensures it should be a lively week for the GBP.

It’s a very quiet week for regional events - tomorrow's RBA meeting minutes the sole scheduled trans-Tasman event to impact the antipodean cross.

Given the distance that risk assets have covered to the upside over the past few weeks, it would not surprise if profit taking delivered a modest pullback this week. Given the lack of volatility inducing events, it would surprise if the Kiwi extended through 63 US cents without any resistance.

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