Risk sentiment improves: China announces more measures to restore confidence. CSI300 rips higher by over 5% but fails to maintain gains as foreign sellers take advantage to quit

By Stuart Talman, XE currency strategist

A busy week ahead of key, tier 1 macroeconomic data releases has commenced on positive footing, although volumes have been relatively light given a UK bank holiday and quiet newsflow.

Equity markets across the globe are higher, US treasury yields and the dollar lower whilst base metals and most energy commodities advance. The top half of the G10 leaderboard is occupied by pro-cyclical currencies, although net moves have been modest.

Starting the new week around 59 US cents, the New Zealand dollar is yet to meaningfully bounce from year to date lows a few pips south of 0.5890. Monday's tight 30 pip range contained price action between 0.5885 and 0.5925.

Broadly, there are two factors that have caused the Kiwi to be one of the worst performing of the majors over the past month - superior macro data flow out of the US and deteriorating sentiment regarding China's growth outlook and financial stability. In the periphery, soft domestic data and weak dairy prices also weighs on the embattled New Zealand dollar. 

Amongst the G10, only the Norwegian Krone has performed more poorly than the Kiwi through August. At 4%, Norway's main lending rate is lower than its developed nation peers. The krone's relatively low liquidity profile makes it one of the market's preferred shorts when the threat of additional Fed tightening and soft eurozone data prevents capital inflow towards the EUR and other European currencies.

Back to the Kiwi, the steep descending channel that evolved from the 14 July high above 64 US cents remains intact, following price action probing upside resistance at last week's highs.

Earlier in the day, Monday, NZDUSD looked likely to re-test the channel’s upper bound, advancing ~25 pips off the week's open as Chinese equity markets started the week sharply higher. 

Over the weekend, the Chinese authorities announced a raft of measures aimed at supporting equities. Cutting the stamp duty on stock trades for the first time since 2008 and pledging to slow the pace of initial public offerings, these and other steps from Beijing are another underwhelming attempt to restore investor confidence which has been rattled by the ailing property market. 

The CSI 300, China's key mainland stock gauge, ripped higher at the open, advancing over 5%.  However, the jubilation for equity market bulls was short-lived as foreign funds responded by selling throughout the day, shrinking the intraday gains to nearer one percent. August's outflows will be the biggest on record, representing a no-confidence vote from investors amidst a series of disappointing policy responses.

At some point, the worm will turn, China's fortunes will appear brighter……some China-watchers commenting that a widespread credit event may be required to compel President Xe Jinping to unleash more widespread, direct fiscal stimulus.

Until this occurs, the China sensitive New Zealand and Australian dollars are unlikely to enjoy a sustained run higher.

In other news from a quiet Monday, retail sales across the Tasman surprised to the upside reversing from the prior month's -0.8% decline to print at +0.5% (vs +0.3 expected). Much of the turnaround was attributed to population growth and an uplift in café and restaurant spending linked to the FIFA Women's World Cup.

The result will not shift the dial for the RBA, widely expected to maintain a 4.10% cash rate at next week's monetary policy meeting.

The Kiwi has range traded against the Aussie from late June, price action contained between 0.9160 and 0.9320. Through August, the NZDAUD range has further tightened between 0.9200 and 0.9320. Marking Monday's low a couple of pips above 0.9190, the short term directional bias is evolving to favour the downside.

A break below the midpoint (0.9182) of the June-July bounce and 0.9160 support may open a path to re-test the 20 June low a few pips above 0.9040.

Looking to the day ahead, it's another quiet 24 hours for economic data releases with the JOLTS Job openings release in the US likely to capture the most attention. Job openings peaked at over 12 million in May 2022 and is expected to print just below 9.8 million for July.

Despite the trend of fewer job openings over the past 12 months, the unemployment rate at 3.5% has remained close to the cycle low of 3.4%, a development that no doubt confounds Jay Powell and his FOMC colleagues. At its most recent (JUN.) statement of economic projections, the Fed's median forecast for the unemployment rate was 4.1% at year-end, climbing to 4.5% by the end of 2024. 

The JOLTS data kicks off a big week of labour market data - ADP Employment Change to drop on Wednesday followed by the week's global headline event: Non-farm Payrolls, released Friday.

Should the week deliver a strong set of jobs numbers, a September hike may be back in play. A hot August CPI, released on 13 September would be required to make the 20 September FOMC meeting a live one.

Regarding the short-term outlook for the Kiwi, the downside bias remains, 59 US cents tenuously holding. During the past fortnight a resistance zone has formed between 0.5960 and 0.6000. We'd need this zone to give way to back an NZDUSD basing call.

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