By Stuart Talman, XE currency strategist
The risk mood is a little brighter through Thursday - equity markets across the globe have logged intraday gains, crude oil and most other commodities are higher, whilst the G10 leaderboard presents an interesting composition with a stronger dollar at the top closely followed by the commodity sensitive CAD and AUD. The pound and euro lagged.
The New Zealand dollar has consolidated its modest weekly gains, NZDUSD advancing to the upper bound of the two-week range, marking Thursday's high in the 0.5940's.
The major storylines from the past 24 hours: US macroeconomic data continues to impress; the ECB delivers a dovish hike; and China continues to defend the embattled yuan.
A busy US economic calendar presented weekly jobless claims, producer prices and retail sales data, all of which added to the narrative of US exceptionalism - the world's largest economy keeps trucking along despite a wave of monetary policy tightening that has significantly raised borrowing costs over the past 18 month.
US Producer prices increased by 0.7% (vs 0.2%, expected), its largest month-on-month increase since June 2022 whilst retail sales advanced 0.6% (vs 0.4%, expected) through August, household spending growing at its fastest pace in 8 months. Much of the strong retail sales result can be attributed to higher energy prices (gasoline prices up over 10% in AUG.) as the data is not adjusted for inflation.
Nevertheless, the US consumer continues to spend at healthy levels given job losses have yet to accelerate. The economy's underlying strength is evident in the Labour Department's weekly jobless claims data, initial claims continuing its trend of downside surprises, having printed below consensus estimates in 9 of the past 10-week, representative of less American's filing for unemployment benefits than expected.
The stronger-than-expected data points induced an interesting response from the market - the three major US equity markets rose in unison with both bond yields and a stronger dollar. Typically, US stocks have struggled amidst climbing yields given the underlying narrative of the Fed that intends to hold its benchmark policy rate, the Fed funds target rate, higher for longer.
Thursday's mix of price action across equity and bond markets suggests the soft landing/no landing proponents were active, happy to bid up US stocks despite the yield on the benchmark 10-year bond advancing back near 4.30% and the dollar index (DXY) spiking higher.
Yesterday we flagged 105.00 as an important DXY technical resistance level, the measure of the dollar against a weighted basket of six major currencies unable to decisively punch through here despite multiple attempts over the past half dozen trading days.
Resistance has caved, DXY ripping higher to mark Thursday's high through 105.40, its highest point since just prior to SVB's failure in early March. Holding the largest DXY weighting of ~58%, euro weakness has been the primary catalyst to catapult the DXY.
The headline event for Thursday, the ECB interest rate decision was shaping up as a cliff-hanger, that is until a leak earlier in the week implied the eurozone central bank would deliver is 10th consecutive hike, lifting the deposit facility rate to 4.00%. The Reuters article citing the unnamed source proved credible. The key take ways from the ECB decision accompanying statement and ECB President Lagarde's presser:
- ECB hikes deposit facility rate by 25bps to 4.00%
- Raises inflation forecast, projected at 3.2% in 2024
- Signals tightening cycle has come to an end
Despite the recent run in poor macroeconomic data, representative of a pronounced slowdown throughout the eurozone economy, the ECB's priority of returning inflation to target trumped any concerns regarding the rapidly deteriorating outlook.
The decision was interpreted as a dovish hike, the statement signalling that further hikes were unlikely via:
Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.
Like the Fed, data dependency was referenced: The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
However, unlike the Fed, the ECB may not adopt the higher for longer mantra given the eurozone economy appears to be rapidly heading towards recession. Lagarde and her GC colleagues will likely be faced with a tough decision in 1H 2024: whether to hold the policy rate at its peak as inflation continues to run above target or succumb to intensifying stagflation concerns to commence the easing cycle.
Despite the inference that the peak policy rate is now in place, further hikes cannot be ruled out given the path for inflation remains murky, uncertainty rising with the pronounced run higher in energy market prices.
The euro was crunched in response, EURUSD logging an intraday loss of over three-quarters-of-a percent to fall into the 1.0630's. its lowest level in 6 months.
Gaining over two-thirds-of-a-percent, NZDEUR pierced through 0.5530 resistance to reach its highest level in over a month, trading through 0.5560. Given the poor macro numbers coming out of the eurozone and the ECB seemingly done, we back the call that the 21 August low a couple of pips south of 0.5420 is a medium-term cycle low.
Having said that, the local economy faces its own challenges whilst the global growth outlook remains cloudy, therefore the Kiwi is not likely to enjoy a pronounced run higher versus the euro. Range trading conditions between 0.5500 and 0.5650 expected as we head into the back end of the year.
In other news from Thursday, the People's Bank of China announced it would cut the reserve requirement ratio (RRR) for all banks, the second RRR cut announcement this year. The RRR is a key regulatory tool used by central banks to control the amount of funds that financial institutions, such as commercial banks, must hold in reserve against their deposit liabilities. RRR cuts aim to motivate banks to increase support for the real economy, thereby boosting confidence.
Across the Tasman, at first glance, jobs number for the Australian economy appeared impressive, almost 65K new jobs created (vs 23K expected) whilst the unemployment rate remained steady at 3.7%.
However, upon closer inspection there were underwhelming elements.
Of the new jobs created, over 60K were part time whilst hours worked fell 0.5% and the underemployment rate rose.
Given there were both positives and negatives amongst the data points, expectations for the path of RBA policy remained materially unchanged, market pricing assigning over a 90% implied probability of incoming RBA Governor Michelle Bullock delivering an on-hold decision at the 03 October meeting.
The Kiwi fell against the Aussie, NZDAUD failing to maintain a foothold above 0.92, declining over a third-of-a-percent to log an intraday low through 0. 9180.The antipodean cross has delivered unremarkable price action through late August and into September, ranging between 0.9180 and 0.9240.
A decisive break below 0.9150 is required to shift the medium-term bias from neutral to negative.
Following an action packed 24 hours, Friday looks set to shift down a gear or two.
Regionally, China activity data will be closely watched, industrial production and retail sales for August released. Offshore, the Uni of Michigan Consumer Sentiment survey is the sole data point that could influence short term direction.
The Kiwi is tenuously tracking for only its second week-on-week gain during the past nine weeks. The NZD bulls need a weekly close above 59 US cents and preferably closer to 0.5950 to enter next week with a little more confidence that NZDUSD bottomed out near 0.5860 on 05 September.
A soft weekly close below 0.59 - the bears retain the upper hand.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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