Equities down, yields down, WTI crude down, gold up, US dollar mixed. USDCNY 7.3 level holds as Chinese authorities continue to defend the yuan. US treasuries mixed: short end firms, long dated yields ease from recent highs

By Stuart Talman, XE currency strategist

The risk tone remains mixed ahead of Jerome Powell's widely anticipated Jackson Hole speech, the three major US equity markets looking unlikely to extend their 2-day bounce, long dated treasury yields pulled back from cycle highs whilst the New Zealand dollar claims top spot on the G10 leaderboard.

During the early hours of Tuesday morning, NZDUSD fell to a fresh 10-month low, a few pips below 59 US cents.  In a quiet news day, NZD buyers re-emerged, lifting the pair above 0.5970 through the London morning as the market's mood appeared to be brightening.

All eyes have been on CNY levels this week given 7.30 represents a major USDCNY level. Having briefly traded above this mark in November, a sustained bout of yuan weakness over the past few months has the pair yet again testing major resistance, looking likely to set fresh ~16-year highs.

The Chinese authorities are doing their best to defend 7.30, having set a series of aggressive daily fixings over the past few days.

A decisive USDCNY topside breakout would likely initiate another downside surge for the New Zealand and Australian dollars.

The market's mood has soured a touch through the second half of European trade and into the US session, the Kiwi reversing from a couple of pips north of 0.5970 before pulling back into the 0.5920's as US equity markets opened.

It’s a big day for US stocks as 2023 market darling Nvidia is set to announce second quarter earnings after the closing bell (0820). A member of the so-called "Magnificent 7", the elite group of megacap tech stocks that have been largely responsible for the broader market's stellar first half performance, Nvidia's results and outlook will likely influence short term direction for US stocks.

Comprising Nvidia, Apple, Meta, Microsoft, Amazon, Tesla and Alphabet (Google), the Magnificent 7's remarkable rally has hit the skids against the backdrop of rising bond yields. These seven behemoths have shed more than US$600 billion in value through August, accounting for around 50% of the S&P500's losses.

The Godfather of AI, as some refer to Nvidia, could re-ignite the tech rally should an anticipated strong outlook accompany an earnings upside beat.  

Embattled risk-sensitive currencies, including the NZD and AUD would likely benefit from an upbeat Nvidia report, rebounding further from current oversold technical levels.

Of course, given AI hysteria and Nvidia's extremely stretched valuation, the bar is set very high for a bullish beat…..any doubts over the sustainability of Nvidia's price may induce pronounced selling through the broader market, precipitating aggressive deleveraging.

Some analysts that favour the bear case for US stocks are calling for a 10% - 15% pullback for the S&P500 as the tech rally is unwound. Currently the market trades circa 5% off the 27 July 15-month high.

Should these bearish calls prove correct, the New Zealand dollar could re-test the October low near 55 US cents.

Attention will also be given to the release of PMIs through Wednesday, the latest activity readings for the eurozone, UK and US economies projected to continue the trend of a contractionary manufacturing environment whilst service sector activity further cools, nearing the 50.0 mark.  The eurozone reading typically elicits a larger market reaction whilst in the US its typically muted as the S&P PMIs take a back seat to the more widely followed ISM versions.

Locally, the headline event is retail sales for July, the trend of softer household spending expected to continue.

Commencing Wednesday's local session near 0.5950, the Kiwi's ripping sell-off is showing signs of slowing momentum. Over the past two weeks, price action has formed a resistance congestion zone between 0.5960/90. A decisive advance through here with 60 US cents forming a new base - we'd be comfortable making the declaration that NZDUSD has formed a short-term base.

Stuart Talman is Director of Sales at XE. You can contact him here.