By Stuart Talman, XE currency strategist
The market's buoyant mood has shifted to one of caution this week, market participants questioning whether the second quarter risk rally has overshot the mark. Risk assets pullback from recent swing highs, unable to sustain the past few weeks’ exuberance.
Whilst the Fed paused its tightening cycle for the first time in over 12 months, last week, the forward guidance provided via the quarterly dot-plots represented a clearly hawkish Fed as more than half of FOMC members project at least two additional 25bps hikes through the remainder of 2023.
The market brushed aside the Fed's hawkish pause, US equities rallied, the S&P500 climbing to within 8% of its January 2022 all-time high.
Back from the Juneteenth holiday, the equity market bulls appear to be dialling back their bullish bets, initiating some profit taking ahead of month and quarter-end rebalancing flows.
The New Zealand dollar is one of the weakest performers amongst the G10 cohort, shedding around two-thirds-of-a-percent, as China-sensitive currencies struggled through Tuesday. The Australian dollar was hardest hit, dropping over one percent.
Treading water above 62 US cents through the Asian morning, the Kiwi was offered through the second half of local trade as poor China related sentiment weighed on risk sentiment and pro-cyclicals.
As widely expected, the PBoC cut the 1 and 5 year Loan Prime rate by 10bps, the first easing of the benchmark lending rate in 10 months. Sell-the-fact price action followed, the Kiwi and other risk sensitive assets offered through afternoon trade, NZDUSD retreating from 0.62 to within a pip or so of 0.6160 before paring losses through the London morning, improving back into the 0.6190's.
Selling pressures re-emerged as US equities opened the holiday-shortened US week on the back foot, the S&P500 down close to 1% at the open, dragging the Kiwi lower.
Logging an overnight low in the 0.6130's, the Kiwi found support at the 200-day moving average, paring losses to commence this morning's session near 0.6160.
Yesterday, we flagged 0.6150/80 as a key NZDUSD support zone. Given two days of selling has delivered a ~1.5% pullback from Friday's highs, we likely enter a period of consolidative, range bound trade given the lack of key event risk for the remainder of the week.
In the day ahead, the sole tier 1 macroeconomic data release is UK CPI.
April delivered a CPI shocker for the UK economy - core CPI rising to a new cycle high at 6.8% from the prior month's reading of 6.2%. Hot inflation in addition to ongoing labour market tightness, including last week's upside wages growth surprise has caused a hawkish re-pricing in UK rates markets, now pricing in a further 150bs of BoE tightening.
The BoE's main policy terminal rate is now projected to be closer to 6%.
Should core CPI deliver another upside beat this evening (6.8% expected) for May, the BoE may opt for a 50bps hike at Thursday evening's monetary policy meeting.
Current market pricing assigns a 75/25 split in favour of 25bps over 50bps.
GBP outperformance has been one of the prominent storylines for 2023, the strongest year-to-date performer amongst the G10 cohort.
Failing to establish a foothold above 0.49 last week, NZDGBP has logged four consecutive intraday losses, matching the 01 June low in the 0.4820's, setting up to mark fresh 3+ year lows this evening if UK inflation continues its undesirable hot streak.
Day 1 of Fed Chair Powell's 2-day testimony to Congress is the other key event over the next 24 hours…..although in the wake of last week's FOMC meeting, it's unlikely that Powell surprises with any new commentary.
Expectations are for sideways trade, NZDUSD to range in the region of 0.6130 - 0.6180.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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