By Stuart Talman, XE currency strategist
The dollar's rally paused through Thursday as has the sell-off in risk sensitive assets, although the three major US equity markets are again weakening into the close. Somewhat concerningly, government bond yields continue to rise on the narrative that major central banks across the globe may not be done - more monetary tightening required to cool the global economy to return inflation to targeted levels.
Net moves in currency markets over the past 24hours have been modest.
The New Zealand dollar's aggressive slide may be slowing, price action delivering a tentative basing signal following a fresh 2023 low marked a few pips above 59 US cents.
On Monday, we commented:
Having found no support at 0.6025 late in the week, the 50% Fibonacci retracement of the October - February range, the next Fib level to monitor is 0.5904 (61.8%). The 0.59 - 0.60 region presents as an obvious basing zone for the Kiwi.
Marking its intraday low early in the Asian afternoon, NZDUSD bounced ~60pips, improving through 0.5960. In five of the past 6 trading days, the Kiwi has ended each day near the bottom of its intraday range, indicative of NZD bears sustaining selling momentum. A daily (theoretical) close near the mid-point of the intraday range or higher would buck the trend, suggesting the Kiwi's precipitous slide is slowing.
Although heading into the final couple of hours of US trade, sellers have re-emerged, pushing the Kiwi down into the 0.5920's.
De-risking late in the US session has been the order of play this week leading to pronounced downside swings for the three major US equity indices and other risk sensitive assets, including the New Zealand dollar.
Negative sentiment regarding China's growth outlook has been one factor for the market's de-risking, the other: the surge in global bond yields with US treasuries leading the charge higher as bond prices fall (yield move inversely to price).
The yield on the benchmark US 10-year bond is currently on a 5-week winning streak, Thursday's advance lifting the yield through 4.32%. In October the yield reached a cycle high through 4.33%, also a 16 year high. Should the strong run of US macroeconomic data flow continue, propelling the 10-yr yield to 4.50%, US equity markets will likely experience pronounced downswings given rising yields are a headwind for equity valuations.
It’s not just a US phenomenon - the yield on the benchmark UK gilt (4.75%) jumped to a 15 year high whilst the German bund (2.70% neared its highest level in 12 years.
Upside surprises in the data flow is creating doubt regarding the call that major central policy rates have either peaked, or are close to terminal. Yesterday's release of the FOMC minutes from the July meeting recorded that (FOMC) participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.
Also released Wednesday, the UK CPI report cemented a September hike from the BoE, core inflation ticking up from 6.8% to 6.9%, remaining close to the 7.1% cycle peak marked in May. Earlier in the week, the UK jobs report delivered another upside beat for wages growth, adding weight to the case for the BoE's terminal bank rate to exceed 6% (currently at 5.50%).
The BoE is not done, the Fed won’t hike in September but may in November, the ECB is favoured to hike in September and the RBNZ may also re-commence tightening in November. Central bank tightening during the mature stage of the cycle against the backdrop of climbing bond yields creates a challenging environment for risk assets to stage their characteristic 4Q rally.
One central bank not likely to tighten next month - the RBA.
Yesterday's labour market report across the Tasman delivered softer-than-expected jobs growth (-14.6K vs +15K expected) whilst the unemployment rate unexpectedly ticked up from 3.5% to 3.7%, a 3-month high. Some of the weakness can be attributed to July school holidays, a period when some people take leave and either start a new job or depart their existing job.
Market pricing assigns a ~90% implied probability to the RBA maintaining the cash rate at 4.10%.
The Kiwi logged a third day of gains against the Aussie, NZDAUD ascending through both the 100 and 200-day moving averages to mark Thursday's high a few pips through 0.9270 before pulling back to 0.9250.
Nearing the top of the past month's range with key resistance located around 0.9320, the Kiwi should continue to outperform for as long as the China newsflow remains negative and global risk sentiment fails to brighten.
Looking to the day ahead, the final sessions of the week deliver national CPI for Japan and UK retail sales.
As we go to print the Kiwi has fallen from 0.5940 to 0.5920 through the New York afternoon…..the late session sellers again appear to be in control. The 0.5904 Fib level is the key near-term downside to monitor.
A weekly close below here maintains the heavy downside bias.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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