By Stuart Talman, XE currency strategist
The risk sentiment dial has flitted throughout Monday's sessions, leaning more positive later in the US session, big tech leading the broader market higher despite the yield on the benchmark US 10-year bond reaching its highest level since November 2007. The Nasdaq's intraday gain exceeded 1.50% whilst the S&P500 advanced over two-thirds-of-a-percent.
Over the past few weeks, risk sentiment has been challenged by the environment of rising bond yields, particularly in the US as a run of stronger-than-expected macroeconomic data compels market participants to subscribe to the Fed's higher for longer mantra.
We'll gain some additional insight into the Fed's psyche later in the week via Fed Chair Jerome Powell's speech at the annual Jackson Hole Symposium.
Powell may follow the tone of last year's speech, delivering a hawkish message to kick back against the view the Fed will be cutting rates as early as 1Q, next year. At last year's meeting of central bankers, finance ministers and academics, Powell famously commented that the Fed funds target rate would need to be aggressively lifted from its then current 2.50% level, likely causing significant pain for the US economy.
Interestingly the pain has yet to materialise.
Despite the policy rate that is 300bps higher, the unemployment rate at 3.5% is at the same level as 12 months ago. Jobs growth remains robust, household spending consistent, house prices have stabilised and the US equity market (S&P500) is 5% higher, the Nasdaq, close to 15%.
Will Powell once again strike an aggressive tone at Jackson Hole, reminding all that whilst the Fed is almost done, the terminal rate will remain at its peak for a prolonged period and the Fed may not be done hiking, or will he deliver a measured speech, reiterating the Fed's data dependency?
Given the tone of recent Fed rhetoric and mature stage of the tightening cycle, he likely adopts a more moderate tone.
Shifting the focus back to the start of the new week, the New Zealand dollar logs a modest intraday gain recovering from a new year-to-date low a few pips below 0.5890 to commence Tuesday's local session near 0.5930.
Opening the new week near 0.5930, the Kiwi was pressured through Asian trade as the embattled yuan continued its struggles against the dollar, USDCNY spiking back through the 7.30 mark.
As expected, the PBoC delivered a cut to the 1-year loan prime rate (LPR) following last week's surprise 15bps cut to the MLF. However, the PBoC did surprise via a smaller than expected, 10bps cut (3.55% to 3.45%) in addition to refraining from cutting the 5-year LPR (4.2%) - the benchmark rate for setting mortgage rates.
Given China's economic woes, it was somewhat of a head scratcher that more conservative monetary easing was favoured. Bloomberg commenting:
The moves highlight a dilemma facing Beijing as it seeks to boost borrowing by cutting interests rates while at the same time needing to preserve financial stability. Lower lending rates would reduce banks’ revenue and profitability, with the PBOC highlighting those risks in a report last week.
An on-hold decision for the 5-yr LPR could be rationalised should Beijing choose to unleash meaningfully large fiscal spending packages.
Such a development would reverse the yuan’s fortunes, boosting the China-sensitive New Zealand and Australian dollars.
The day ahead looks to be a quiet one given the lack of market moving events.
As we go to print, US equity markets have logged bullish closes at the top of intraday ranges, suggesting the buy-the-dip cohort are active.
Likewise, the Kiwi bucks the trend of the run of soft intraday (theoretical) closes, ending Monday within a half dozen pips of the day’s apex. It does appear NZDUSD is attempting to base around 59 US cents, however it is still premature to back this call with conviction.
We'd need to see the pair re-establish a foothold above 60 US cents to back a short-term basing call.
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Stuart Talman is Director of Sales at XE. You can contact him here.
2 Comments
NZD bounces from lows.....
No disrespect intended.
When I saw that headline I wondered if there were alternative data sets out there that I was unaware of.
A month ago NZ/US was $0.64+. So lifting from $0.589 something to $0.592 is more like a ripple than a bounce.
I did register that bounce was not mentioned in the text.
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