By Stuart Talman, XE currency strategist
The risk mood has soured through Tuesday inducing pronounced selling across risk assets. US equity markets continue to retreat from late-July prominent swing highs as selling momentum appears to be ratcheting higher as market participants take profit at overbought levels.
Global bond yields are notably softer, particularly for the likes of Germany and Italy, commodities pull back, whilst the dollar is stronger against all its G10 peers.
The New Zealand dollar's modest two day rebound has ended abruptly, vigorously reversing to reject 61 US cents, logging an intraday decline of close to one percent. Not only has Tuesday's sell-off breached last week's low near 0.6060, it also breached the 29 June swing low at 0.6050.
The NZD bears are in full control…..Tuesday's overnight low marked a few pips above 0.6030
Next stop - the year-to-date low at 0.5985.
Given the absence of any scheduled market moving events for the US, eurozone and UK, expectations were for a subdued 24 hours of trade….larger moves ensued.
So, why has the market pivoted into defensive mode?
The obvious answer: further soft data out of China via the release of trade balance data for July.
Downside misses in both exports (-14.5% vs -12.5% expected) and imports (-12.4% vs -5%) added to the recent constant flow of disappointing macroeconomic data for the world's second largest economy. Exports falling to a five-month low, logging the steepest decline since February 2020 is indicative of weakening global demand.
The notable downside miss: the imports reading.
Falling for a 9th consecutive month, marking the steepest decline since February, the slump in imports represents weak domestic demand, a trend the Chinese authorities are attempting to reverse via a raft of recently announced policies, designed to facilitate more efficient supply of consumer goods to Chinese households.
These new initiatives have underwhelmed given they fall short of injecting direct support to consumers via more targeted fiscal stimulus.
The expectation heading into 2023 - the Chinese economy would roar back to life following the abrupt abandonment of covid-zero policy in December. However, a sputtering recovery has ensued, primarily due to widening cracks in China's property market and softening global demand as a historically aggressive synchronised global monetary tightening cycles cools the global economy.
The China sensitive New Zealand and Australian dollars have suffered amidst the deluge of negative China newsflow, both declining over 4%, year-to-date, outpaced to the downside by only the Japanese yen.
The antipodeans will likely remain under pressure whilst the Chinese authorities fail to follow through with more powerful stimulus measures, such as the fiscal support packages that were rolled out by western economies to aid the pandemic recovery.
Other news stories that weighed on sentiment through Tuesday: Moody's cutting its credit ratings on 10 mid to small sized US banks, the ratings agency adding that it may downgrade larger lenders as part of a sweeping reassessment of the US banking sector. The banking downgrades follow Fitch's sovereign downgrade last week, lowering the US's rating from AAA to AA+.
Across the Atlantic, the banks were also in the firing line following the announcement in Italy of a new tax on bank profits, expected to deliver tax receipts in excess of €2 billion via a 40% withdrawal from banks' multi-billion-euro super profits.
The headlines on both sides of the Atlantic added to market jitters, compelling investors to question the sustainability of the 2023 rally in global equities.
We could be destined for a turbulent period ahead, which, seasonally would not be out of character as we head into the second half of the Northern Hemisphere summer. Volumes are typically lighter during this period, thinner liquidity causing a volatility step-up.
Looking to the day ahead, China remains in focus as the economic calendar delivers and inflation double header: CPI and PPI for July. Consumer prices are expected to print in deflationary territory (falling from 0% YoY to 0.5%) for the first time since February 2021 whilst producer prices will continue the undesirable streak of a 10th consecutive month of negative growth.
It will be the first time since late 2020 that both consumer and producer prices register contractions.
Locally the RBNZ releases its inflation expectations survey, reporting on NZ corporates expectations for the level of CPI, 2 years from now. Expectations peaked in the December quarter and are expected to further ease.
Expectations are for further Kiwi downside given the strong headwinds generated via the recent China macro data flow. Our next downside level to monitor is 0.6025, the 50% Fibonacci retracement of the October to February rally.
A decisive break of 0.6025 followed by an upside surprise for US CPI (overnight, THURS), NZDUSD could well log a fresh 2023 year-to-date low before the week is done.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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