By Stuart Talman, XE currency strategist
Subdued price action has characterised the first trading day of 2H with light volumes trading ahead of tomorrow's US Independence Day holiday. Following a fierce first half rally driving the Nasdaq to its largest 6 month gain since 1983 whilst the broader S&P500 gained over 15%, US equities have logged marginal gains through Monday.
Risk sentiment has leaned positive in recent weeks, the mood buoyed by the narrative that the Fed is nearing the end of its tightening cycle whilst the US economy looks to be on track to avoid a pronounced downturn.
Whilst there are cracks, on the whole, activity levels are holding up under the weight of 500bps of monetary tightening, evidenced by a period of upside macroeconomic data beats through the second half of 2Q.
The risk sensitive New Zealand dollar benefitted from the positive undercurrents, rebounding from a year-to-date low near 0.5985 on 31 May to near 0.6250 midway through June. Upside momentum evaporated over the past fortnight as Fed Chair Powell and some of his FOMC colleagues sent a clear message: we ain't done hiking, yet.
Climbing steadily throughout June, firmer US bond yields have supported the dollar, in turn pushing NZDUSD back to midpoint (0.62) of the June rebound, the pair awaiting its next directional catalyst.
US employment numbers this Friday in addition to next week's US CPI report could very well be the catalysts that determine the next key directional move for risk assets throughout July. Upside surprises representative of an impressively resilient labour market despite sticky inflation confirms the narrative of at least two more 25bps rate hikes from the Fed, likely causing a re-think of equity market valuations given megacap tech stocks' frothiness.
Alternatively, in-line or modestly soft data prints will provide the fuel for the bulls to drive equity markets higher, further extending the S&P500 and Nasdaq beyond 15 month highs.
In this scenario procyclical currencies, including the New Zealand dollar outperform the safe havens (USD, JPY, CHF), NZDUSD improving to once again test major resistance at 63 US cents.
Commencing the new week near 0.6120, NZDUSD price action has mostly traded within a 0.6130/70 range, starting Tuesday's local session near 0.6150. The Kiwi's slide was halted near 0.6060.
Last week's sell-off induced some important technical developments, including NZDUSD price action decisively breaking below both the 200-day moving average. This trend following indicator is widely monitored, used to influence trading decisions.
An example of an NZDUSD sell set-up: should price action fail to break back up through the moving average this week, tipping over and failing to maintain a foothold above 0.6100, the NZD bears likely increase bets of further downside for the Kiwi.
The 200d MA is currently located near 0.6170.
Therefore, our key upside region to monitor this week is 0.6170 - 0.6200. This region has acted as either support or resistance during the past four months as the Kiwi has tested the lower and upper bounds of the prevailing range. Should the NZD fail to regain a foothold above 0.62 in addition to a key fundamental development, such as a stronger-than-expected jobs growth and/or a robust average hourly earnings number in Friday's employment report, supporting a stronger dollar, a more pronounced downswing may ensue.
Shifting our focus to the day ahead, the offshore sessions are likely to be sedated given US markets are closed for the 4th of July holiday and the UK and eurozone economic calendars are absent any tier 1 data events.
The headline event is the Reserve Bank of Australia's interest rate decision.
Following non-consensus hikes in May and June after an April pause, today's meeting is a tight call. Market pricing favours an on-hold decision whilst 16 of 31 economists surveyed by Reuters expect another 25bps hike, lifting the cash rate to 4.35%.
Despite last week's headlines reporting a drop in headline inflation via the Australian Bureau of Statistics monthly CPI, the trimmed mean, the RBA's preferred measure was unchanged, remaining above 6%. In addition, a tight labour market, signs the housing market has bottomed and strong net migration add weight to the case for further policy tightening.
The monetary policy sensitive antipodean cross should deliver lively price action at 4:30 this afternoon, NZDAUD reversing the past fortnight's recovery from 4 months lows near 0.9050 should the RBA pull the trigger.
Conversely, an on-hold decision would propel NZDAUD through a 0.9230/50 resistance zone that includes the 100-day moving average.
We favour the RBA delivering the 13th hike of this cycle……NZDAUD to initiate a move back towards 0.9050.
Regarding NZDUSD, expectations are for a tight range over the next 24 hours, price action trading in the mid to high 0.61's.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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