By Stuart Talman, XE currency strategist
Risk tones have leant positive through the week's first sessions, albeit price action for most assets has traded in tight ranges ahead of key central bank decisions which kick off with the FOMC meeting in the early hours of Thursday morning.
US equities grind higher, the Dow on track to extend its winning streak through an 11th day, gaining just over half a percent with under an hour remining in US trade. Bond yields were down earlier in the session, before reversing higher - the yield on the Fed sensitive US 2-year bond ascending through 4.90%, looking likely to pop back through 5% should the Fed deliver a hawkish 25bps hike this week.
A notable underperformer last week, the New Zealand dollar commences the new week sitting atop the G10 leaderboard, gaining around two-thirds of a percent. Commodity currencies have benefitted from reports that the Chinese authorities will announce fresh stimulus measures at this week's meeting of the Politburo.
Energy and base metals commodities have benefitted, WTI crude trades at its highest level since late April, breaking up through its 200-day moving average. Price action has not traded above the widely monitored trend following indicator for over 12 months and could extend higher should the market be impressed with any new fiscal programs announced to boost the Chinese economy.
OPEC cuts are also assisting with pushing crude higher.
We'll be monitoring price action closely as the possibility of the market again having to deal with crude approaching US$100/barrel surely causes concern for the inflation doves who have prematurely declared victory on the war on inflation.
Opening near 0.6160, the New Zealand dollar chopped around in local trade before catching a bid through the London morning, improving through 62 US cents to mark Monday's intraday high around 0.6215.
Referencing the 31 May to 14 June rebound, the 61.8% Fibonacci retracement is located at 0.6148, residing in a 0.6120/60 region that has halted the Kiwi's slide on multiple occasions over the past 6 weeks.
Following last week's 3%+ washout, it appears the NZD bears are unwilling to drive the pair through this zone ahead of the Fed's interest rate decision.
The market is expecting hawkish language and commentary via both the statement and Fed Chair Powell's press conference; therefore the bar has been set high for a hawkish surprise.
Aside from the year's first FOMC meeting (FEB. 01) the USD has weakened following the March, May and June meetings….it would not be a surprise to see the Kiwi bounce this week, particularly if Powell implies the Fed is almost done.
Monday's economic calendar has delivered S&P Global’s preliminary PMIs, reporting on the state of play for the manufacturing and services sectors for developed economies across the globe.
Typically the eurozone PMIs elicit the most pronounced reaction - the EUR is the noted underperformer to start the week…..although much of the downside surge can be attributed to the snap Spanish election. The result was much closer than expected representative of a fragmented political landscape as the centre-right People's Party increases its influence but did not have the numbers to form a majority-government.
Political uncertainty in the world's 15th largest economy is a headwind to growth given the obstacles to passing fiscal and other economic reforms.
Back to the PMIs, the flash surveys reported the most significant contraction for the eurozone economy since November as both the manufacturing (42.7 vs 43.5) and services (51.1 vs 51.5) PMIs missed consensus forecasts. The soft readings extend a trend indicative of cooling economic growth as the zone heads towards an inevitable recession.
The one bright spot from the surveys - the prices paid sub gauges continue to head south, although significantly less so in the service sector.
Sitting at the bottom of the G10 leaderboard, the EUR struggled against all its major peers, NZDEUR climbing around one percent. The pair once again found support in the 0.5530's, as it did on 26 April, forming a prominent cycle low at 3-year lows.
It’s too premature to label the 26 April and 24 July lows as a double bottom pattern, price action required to improve through old support at 0.57 to back this call.
Both the manufacturing and services PMIs for the UK also surprised to the downside, but at more elevated levels compared to the eurozone data. In the US, the manufacturing PMI easily surpassed estimates (49.0 vs 46.4) whilst services missed (52 vs 53.1), but remains firmly in expansionary territory. The ISM PMIs (rather than the S&P Global) are more widely followed in the US.
Looking to the day ahead, its likely to deliver subdued price action and condensed ranges given a very quiet economic calendar. The focus will be on the earnings calendar - Alphabet (Google) and Microsoft reporting. Should these tech behemoths deliver softer forward guidance as Netflix did last week, tech stocks likely lurch lower.
The Kiwi traded a 0.6156 to 0.6215 range through Monday…..expect similar levels through Tuesday.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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