By Stuart Talman, XE currency strategist
The bond market sell-off (higher yields) has been the dominant theme over the past few weeks as market participants re-price the Federal Reserve's monetary policy cycle to more closely align with the Fed and other central banks' higher for longer motif.
Wednesday has provided a mild reprieve, the 10-year treasury yield pulling back from its 16-year high near 4.90% to settle near 4.75% through the later stages of US trade.
In turn the dollar has paused its unrelenting ascent, softer against most major peers. The modest improvement in risk sentiment has enabled US equity markets to halt their slide……for the time being.
Having declined over 8% from its late July highs, the S&P500 is approaching the 200-day moving average (200d MA), currently located near 4,200. Tuesday's and Wednesday's lows marked a few points below 4,220.
Should the ten-year yield pierce through 5.00% in the days ahead, you can bet that US stocks will be heavily sold driving the S&P500 below the 200d MA. Price action has remained above the widely monitored trend following indicator for the past 10 months. A decisive move below would likely initiate a pronounced wave of selling, in turn negatively impacting other risk sensitive assets, including the New Zealand dollar.
Following Friday's aggressive rejection of 0.6050, NZDUSD has been forcefully offered throughout the first half of this week, sliding close to 3% (from 0.6050) to mark Wednesday's intraday low a pip or so above 0.5870, falling to within a dozen pips of the 05 September low near 0.5860.
Arresting the slide through the Asian afternoon, the Kiwi has pared losses throughout the European and US sessions, its rebound assisted via a soft ADP Employment change release and the ISM Services PMI printing in-line.
Less prestigious than Friday's nonfarm payrolls (NFP) data point, ADP data reported that private businesses in the US added 89,000 (vs 153K, expected) jobs through September, marking the slowest pace of growth since January 2021. It’s the second month ADP data has surprised to the downside following four months of notable beats.
Take it with a grain of salt as the ADP Employment Change release is frequently dismissed as a credible indicator given its shady correlation with NFP.
Unlike ADP, the ISM Services PMI is an important and influential data point.
Service sector activity in the US eased from 54.5 to 53.6 (in-line) in September. Aside from December's sub-50.0 reading, the PMI has printed in expansionary territory for every month since May 2020.
US equities and pro-cyclical currencies firmed following the release as bond yields added to intraday declines, the market cheering a key US macro data point that did not run hotter than expected.
Pushing back up through 59 US cents, NZDUSD marked Wednesday's highs in the 0.5920s'.
Earlier in the day the Kiwi fell from around these levels following a somewhat dovish hold from the RBNZ. The key takeaways:
- RBNZ on-hold, OCR maintained at 5.50%
- Higher for longer requirement emphasised
- Assessment of outlook unchanged from August MPS
Immediately following the release of the on-hold decision and accompanying statement the Kiwi plunged circa 50 pips from 0.5920 to 0.5870 as the tone of the statement was less hawkish than expected.
The Committee acknowledged that interest rates may need to remain at a restrictive level for a more sustained period of time given the near-term risk that inflation does not slow as much as needed.
Whilst the door remains open to a potential 25bps hike in November, the language used in the statement suggests the RBNZ's preference is to hold the OCR at its peak for a longer period rather than unleashing additional monetary tightening.
That being said, should the 3Q CPI (released 17 October) and 3Q jobs reports run hot, the probability of a November hike ratchets higher. Current market pricing assigns a less than 60% implied probability the OCR is lifted to 5.75%.
The rate sensitive antipodean cross also fell, NZDAUD reversing from the 0.9370's to the 0.9320's before paring losses to start Thursday near 0.9340.
Given both the RBNZ and RBA now favour a similar outlook, key incoming data, namely employment and inflation, will dictate the next key directional move. In the short-term, should risk sentiment continue to lean negative, the Kiwi should consolidate its 3-week advance, remaining supported above 0.9300.
In other news from Wednesday, eurozone retail sales fell by -1.2% (vs -0.3%, expected) in August, continuing the run of poor macroeconomic data for the EU. The slowdown in household spending appears to be accelerating under the weight of ECB tightening.
The Kiwi fell against the euro, NZDEUR weighed down by the RBNZ's dovish hold. Having plunged from 0.5650 through 0.5610 during local trade, the pair mostly ranged between 0.5610 and 0.5630 through overnight trade.
Barring a major deleveraging event, the pair should consolidate its 5% rebound from the 21 August three year low through 0.5420 given the rapidly deteriorating outlook for the eurozone economy and an ECB that has likely concluded its tightening cycle.
Looking to the day ahead, markets may slip into wait-and-see mode ahead of the week's headline event: September's US employment report. A light calendar over the next 24 hours precents AUS trade balance and initial jobless claims in the US.
Look for NZDUSD to trade in a tighter range, within close proximity to 59 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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