Markets trade with a cautious tone, awaiting more key inflation data. Equities down, bond yields down, crude up, US dollar down. NZD finds support and improves in subdued trade

By Stuart Talman, XE currency strategist

Markets have traded with a cautious tone to start the new week, market participants wary following recent hawkish policy updates from major central banks, Friday's poor PMI data and the abandoned Russian military coup. The risk tone is mildly soft, the three major US equity indices are mixed, global bond yields are mostly lower, crude and other commodities are firmer as the dollar trades modestly to the downside.

Commencing the week near 0.6140, the New Zealand dollar is one of the better performing majors, gaining around half-a-percent, the second best performer on the G10 leaderboard. Choppy conditions have mostly contained price action between 0.6140 and 0.6170, halting the previous two-days sell-off from Thursday's highs through 0.6220.

Around half of June's 4%+ rebound has been given back over the past week-and-a-half, NZDUSD pulling back on negative China sentiment, renewed central bank aggression and growing recessionary concerns given recent hot CPI reads for some developed economies.

This week will deliver important inflation updates via CPI reports for Canada, Australia and the eurozone, whilst on Friday, the Fed's preferred inflation gauge, Personal Consumption Expenditure (PCE) is released.

PCE is expected to print at 0.4% MoM, 4.7% YoY. An upside beat would push the market to more closely align with the Fed's most recent dot-plots. Released two weeks ago at the 14 June FOMC meeting, more than half of FOMC officials projected 2 or more rate hikes before the end of the year.

Fed funds futures currently assign a 75%+ probability the Fed lifts the target rate 25bps to 5.25%-5.50% on 26 July, but unlike the Fed, does not project additional hikes later in the year.

Should the PCE report require a hawkish repricing of Fed expectations, expect pronounced selling - US equities and other risk assets, including the New Zealand and Australian dollars to lurch to the downside. Conversely, in-line or soft PCE data may re-ignite the tech fuelled equity market rally which may offer some support to equity sensitive currencies.

The day ahead is light on market moving events with central bank officials from the ECB and BoE scheduled to speak.

Marking Friday's lows a pip or so below 0.4810, NZDGBP is treading water above a critical support zone between 0.4770 and 0.4800, the former a key level in March - May 2020 when risk assets initiated their rebound from the depths of Covid fear and panic.

This period was the sole occasion over the past 7 years that NZDGBP has traded below 0.48.

The 38.2% Fibonacci retracement of the May-June swing low is located at 0.4906. The pair has failed on three precious attempts to through June to establish a foothold above 0.4900. We'd need to see sustained price action above here before considering a cycle low near 0.48 has formed.

The major macroeconomic data point for Tuesday is CPI for Canada, core expected to decline from an annualised reading of 4.1% to 3.9% in May. The cycle peak was marked at 6.1% in June, last year. A hot report would likely fuel further risk aversion on the view that global inflation will take far longer than projected to return to targeted levels.

Australia releases its monthly CPI reading tomorrow, expected to decline from 6.8% to 6.1% in May. Whilst not as comprehensive as the quarterly CPI report, the relatively new monthly read is an important input for RBA policy.

Over the past week, NZDAUD has bounced over 2% from near 0.9050 to log Monday's high a couple of pips through 0.9240. Dovish (relative to expectations) RBA minutes and CNY weakness have been the major factors for the Aussie's underperformance which would continue should monthly CPI print below 6%, YoY.

We feel it may prove premature (as it did earlier in the year) to make dovish assumptions regarding the near-term path for RBA monetary policy.

Our key NZDUSD levels to monitor over the next 24 hours: 0.6116 on the downside and 0.6200 on the upside. The former is the mid-point of the June rebound whilst the latter aligns with the 100-day moving average and downtrend resistance.

A decisive break either side of these likely dictates direction for the remainder of the week.

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