By Stuart Talman, XE currency strategist
An easing in US treasury yields and the dollar has been the story of this week, pulling back from recent prominent swing highs as the macroeconomic data flow out of the US surprises to the downside.
Market participants are increasingly assured the Fed will not hike beyond the current 5.25% - 5.50% level for the Fed funds target rate.
Following on from softer-than-expected JOLTS Jobs Openings data and a weak Consumer Confidence survey, 24 hours prior, ADP employment change has also missed the consensus forecast (177K vs 195K expected), suggesting the US labour market is starting to cool quicker than expected.
The slowest pace of private business jobs growth in five months, July's result is consistent with the pre-pandemic run-rate, indicating the two years of exceptional gains induced by the re-opening are slowing to a more sustainable pace.
Risk assets have been cheering the macro data misses.
The three major US equity markets are on track for a fourth consecutive day of gains, the Nasdaq leading the rebound, up over 5% during this period. This follows a pullback from 16-month highs in late July when a run of hot activity data fueled the narrative that Jay Powell and his FOMC colleagues were not done hiking.
In turn, the yield on the benchmark, US 10-year bond ripped to a near 16 year high, compelling some market commentators to declare the Fed would keep hiking the policy rate beyond 6%.
In some cases, higher yields can negatively impact equity valuations as a higher discount rate adversely impacts the value of future earnings. The return on treasuries suddenly becomes more attractive, leading some market participants to rotate out of stocks and into higher yielding bonds.
As the yield on the US 10-year ascended through a key resistance level near 4.35%, jittery equity market bulls exited the market, worried that should the yield extend higher towards 4.50%, a pronounced downside washout would ensue.
Falling through 4.10% through Wednesday, the lower 10-year yield has induced a collective sigh of relief from the bulls.
Pro-cyclical currencies, including the New Zealand and Australian dollars that are tightly correlated to equity market direction are flashing more reliable basing signals following an aggressive six week sell-off to 9-month lows.
The Kiwi looks to have formed a double bottom in the 0.5880's following Tuesday's rapid reversal and Wednesday's continuation, NZDUSD trading back through 60 US cents for the first time in a few weeks.
Marking an overnight high a few pips below 0.6010, the Kiwi is paring gains through the New York afternoon, pulling back below 0.5970.
This week, we have stressed the importance of a 0.5960 to 0.6000 resistance zone.
We would need to see NZDUSD navigate through here to form new support above 0.60 to further confirm the 25 August low a few pips below 0.5890 is a medium-term swing low. Also in close proximity to the upper bound of our resistance zone: the 23.6% Fibonacci retracement of the July to August sell-off is located at 0.6010.
In other news from Wednesday, monthly CPI across the Tasman fell to a 17-month low, printing at 4.9% (vs 5.2%, expected), falling from 5.4%, the month prior. The result is encouraging for the RBA and those households experiencing mortgage stress, adding further weight to the argument that the cash rate has peaked at 4.10%.
Market pricing via 30-day interbank cash rate futures assigns a near 90% probability the RBA will keep the cash rate on hold next Tuesday.
Interestingly the Kiwi's immediate reaction was to weaken against the Aussie, NZDAUD falling from north of 0.9220 through 0.9190 before easing back above 0.92 through overnight action.
Choppy, range bound trading has been the order of play for the antipodean cross since late June, mostly ranging between 0.9160 and 0.9320.
Looking to the day ahead, it may prove to be a lively affair given the economic calendar delivers multiple events that could induce pronounced movement.
Regionally, China PMIs are the headliner, manufacturing expected to tick higher, but remain in contractionary territory whilst non-manufacturing (services + construction) is projected to fall for a fifth consecutive month, nearing the 50.0 threshold that segregates expansion and contraction.
Following Wednesday's nation level CPI reports, eurozone CPI is released this evening, the core reading projected to fall from 5.3% to 5.1%. Inflation prints in Germany and Spain surprised to the upside, remaining too high for comfort. Should the eurozone reading follow a similar path, the ECB likely hikes at its 14 September meeting.
Three-year lows for NZDEUR were marked a couple of pips below 0.5420 on 21 August. The pair has improved to range trade between 0.5450 and 0.5500 during the past 6 trading days. An upside CPI surprise would drive the pair back towards cycle lows.
As for NZDUSD, early morning price action suggests a mild rejection of 60 US cents. More work needs to be done in the mid to high 0.59's ahead of another upside re-test.
The Fed's preferred inflation gauge, core personal consumption expenditure is released overnight and will surely dictate the Kiwi's short-term direction. Should core PCE print above 4.2%, NZDUSD tracks back towards 0.59.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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