By Stuart Talman, XE currency strategist
Ahead of the week's major event, the July US CPI report, markets have slipped into wait-and-see mode, trading in tighter ranges. Risk sentiment continues to lean negative although intraday declines for US equity markets and pro-cyclical currencies are modest.
Through Wednesday's sessions the New Zealand dollar has ranged between 0.6045 and 0.6095, catching a bid to intraday highs in the early Asian afternoon on reports that China's major state-owned banks were selling dollars to buy yuan, thereby driving the dollar lower.
The dollar rebounded through the London morning resulting in steady selling, NZDUSD shedding ~50pips before finding support in the 0.6040's rounding into the New York afternoon.
Price action continues to trade in a steep descending channel, indicative of NZD sellers in full control.
In the event of a downside miss or upside beat, this evening's US inflation numbers will dictate the next key directional move.
Annualised headline inflation is expected to tick up from 3.0% to 3.2% whilst core (ex-volatile food and energy prices) is projected to remain steady at 4.8%. A core reading of 5% or greater would likely be needed to deliver a pronounced downside surge for US equities and other risk assets, casting doubts over the consensus view that the Fed will not be hiking the target rate at its 19-20 September FOMC meeting.
Current market pricing assigns a less than 15% implied probability of a 25bps hike.
A downside CPI miss, the bulls will presumably charge back into US equites, particularly rate sensitive tech stocks which have underperformed following last week's ratings US sovereign debt downgrade via Fitch.
Of course, the CPI release could prove a non-event should the market receive in-line readings.
Remaining on the topic of inflation, yesterday delivered CPI and PPI for China, both printing in deflationary territory (CPI -0.3% YoY, PPI -4.4%) for the first time since late 2020. Turbulence in China's real-estate sector is one factor driving sluggish household spending, resulting in manufacturers cutting the price of goods to run down excess stock.
Cheaper consumer goods from China are not looked on favourably as periods of falling producer prices for the world's second largest economy typically leads to a global recession as it represents both weakening domestic and global demand.
You must head back to the second half of 2015 and into early 2016 for the last example when China’s producer prices fell to similar deflationary levels, a period that yielded aggressive downtrends for the China sensitive New Zealand and Australian dollars, the Kiwi falling close to 20% through the June quarter to year-end, 2015.
Some argue that peak negativity regarding the China growth outlook has been reached and therefore baked into current NZD and AUD levels. Should this argument prove prescient, the antipodeans (particularly the Aussie) will enjoy a period of outperformance when China's news flow brightens.
Looking to the day ahead, weekly jobless claims accompany US CPI as the other data event that could influence short term direction. Five of the past six weeks have surprised to the downside (less Americans filing for unemployment assistance than forecast), one amongst many data points that signal the US jobs market remains resilient in the face of 525bps of Fed tightening.
Another print in the 220K's or lower presents as a win for the soft/no landing camp, and provided CPI does not run hot, should see the equity market dip-buyers out in force.
Commencing today’s local session near 0.6060, the Kiwi is attempting to base by forming a double bottom (with the 29 JUN. low) in the 0.6040/60 region. We’d like to see NZDUSD improve back to the midpoint (0.6223) of the July-August sell-off before declaring an end to the Kiwi's descent.
Daily exchange rates
Select chart tabs
Stuart Talman is Director of Sales at XE. You can contact him here.
1 Comments
I would argue that China's bad news has not yet been "baked into" the NZD.
Our economists and commentators have kept on a positive spin well past reality, half expecting/hoping things in China would improve. I understand agriculture is only one part of NZ's economy however the first dollar earned multiplies through the rest of the economy and with recent news from Fonterra and the meat processors that first dollar is going to be pretty thin on the ground.
My (recently increased) overdraft is right on the limit and there is no discretionary/capital money left in my budget.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.