By Stuart Talman, XE currency strategist
Sentiment has yo-yoed over the past two weeks.
On the one hand a run of stronger-than-expected macroeconomic data compels market participants to bid up risky assets, driving the S&P500, Nasdaq and other bourses (Japan's Nikkei reached a 33 year high, Monday) across the globe to prominent highs. Upside beats in housing, consumer spending, labour market and GDP data fuelling the narrative the global economy is strong and resilient. The most widely anticipated recession (in maybe for ever) fails to materialise.
On the other hand, the solid data flow requires central banks to maintain their respective tightening bias as the descent from multi-decade high inflation takes far longer than policy makers had forecast. Terminal rate expectations step-up with each new set of central bank economic projections. At some point, the higher for longer requirement will significantly cool economic activity as the long and varied lag effects of monetary policy inevitably take effect.
Upside data beats have again been the story during Thursday's sessions starting in the Asian session with retail sales for both the Japanese and Australian economies comfortably exceeding consensus estimates. Household spending across the Tasman grew at a month-on-month rate of 0.7% (vs 0.1% expected), a result that provides the RBA with more food for thought ahead of next Tuesday's interest rate decision.
In the US a strong GDP report and pullback in weekly jobless claims has compelled rates markets to re-assess the path for Fed policy through 2H, bond yields ripping higher as the market concedes Jay Powell and his FOMC colleagues’ view - the target rate is likely to be lifted by an additional two 25bps hikes.
The final reading of 1Q economic activity for the US economy printed at an annualised growth rate of 2% (vs 1.3% expected), beating the consensus estimate by a whopping two standard deviations, the largest upside beat in over a decade. The primary drivers of the impressive GDP print were surging exports and consumer spending growth accelerating more than expected to 4.2%, the strongest in nearly two years.……astounding result in the face of 500bps of Fed tightening.
The recession naysayers were cheering.
The US dollar was under pressure heading into the data releases, reversing course as the yield on the monetary policy sensitive US 2-year bond ripped back through 4.80% reaching 4.89%, its highest level since before the regional banking turbulence.
Nearing the cycle high at 5.08% (marked on 09 March), should the yield on the 2-year continue to march north, US equity market will surely start to wobble and tip over.
The New Zealand dollar range traded between 0.6070 and 0.6100 through Thursday's local session and the London morning, as another strong daily fixing from the Chinese authorities supported the yuan and China proxies, the NZD and AUD.
Price action lurched lower following the US data, NZDUSD nosediving from 0.6100 to mark a fresh three-week low at 0.6050.
A venture back down into sub-60 US cent levels looks an inevitability given the market more closely aligning with the Fed's late cycle outlook.
Fed funds futures currently assign a 85% implied probability the policy rate will be lifted to 5.25% - 5.50% on 26 July and a ~50% probability that a second post-pause hike is delivered at either the September or November FOMC meetings.
Next Friday's US employment report will be a key input into the Fed's July decision. Strong jobs growth and the unemployment rate remining near the cycle low validates the Fed's additional 50bps of projected hikes.
Looking to the day ahead, eurozone CPI is one of two headline events, annualised core inflation projected to rise from 5.3% to 5.5%. The nation-level CPI reports were released during Thursday's session - notably, German core inflation climbed from 6.1% YoY to 6.8% last month. A hot eurozone number may have spillover effects for risk assets across the globe, inducing selling.
Regionally, CPI for Tokyo and PMIs for China will be the focus.
The other headline event is the Personal Consumption Expenditure index for the US economy - the Fed's preferred inflation gauge. An annualised reading above 4.7% will add to the inflation jitters whilst a reading below 4.5% questions the need for 2 more Fed hikes.
Expectations are for the Kiwi to remain pressured into the week's close…..a 59 handle may trade if EU CPI and US PCE run hot.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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