Longer dated yields arrest last week's slide, modestly higher to start week. Tight range trading the order of play. Numerous Fed officials speaking: will they kick back against dovishness?

By Stuart Talman, XE currency strategist

The major development from last week was the aggressive pullback in rates markets - longer dated US treasury yields crunched following a series of softer reads on the US economy and the market's dovish interpretation of Jerome Powell's FOMC press conference, the Fed Chair unwilling to commit to additional rate hikes.

Risk sensitive assets took flight, the S&P500 and Nasdaq surging by 5.9% and 6.6% respectively, logging their biggest week-on-week gains in 12 months. High beta currencies outperformed, the New Zealand dollar's weekly gain of over 3% was the largest amongst the G10 cohort.

The impressive three-day rally through the second half of last week lifted the New Zealand dollar back through 60 US cents for the first time since early October, rapidly shifting the short-term bias from negative to neutral.

Fundamentally, it's too premature to call an end to the US dollar's dominance given more evidence must be received to confirm economic activity is cooling at a quickening pace. Whilst Friday's jobs report and ISM Services PMI notably missed consensus forecasts, the US labour market remains tight, and households continue to spend at non-recessionary levels.

The incoming macroeconomic data flow to round out the year will be crucial in determining the path for risk assets through the first quarter of 2024.

Should last week's softer data flow fail to evolve into a sustained run of slowing activity data through November and December whilst inflation remains stubbornly high, the market will pivot to considering additional Fed tightening, early in the new year.

Conversely, if labour market conditions further loosen via slowing jobs growth and the unemployment rate extending beyond 4% (currently at 3.9%), the base case of no additional Fed hikes will prove correct.

A quiet US economic calendar for the week ahead ensures the market's focus will be in the constant flow of Fed officials speaking throughout the week.

Last week, the mix of plunging bond yields and soaring equity markets served to significantly loosen financial conditions, the yield on the benchmark 10-year note dropping from above 4.90%, through 4.50%.

Will Fed officials choose to kick back against the narrative that they are done?

Powell was clear in his FOMC presser: the FOMC committee are not thinking about rate cuts, but rather continue to question whether the target rate is at a sufficiently restrictive level to induce the required cooling in economic activity to return inflation to the Fed's 2% target.

The circa 50bps retreat in the 10-year yield was indicative of a market that dismissed the hawkish elements of Powell's rhetoric.

To start the new week, the 10-year yield is firmer. Marking Monday's highs around 4.65%, the yield has rebounded over 15bps from Friday's lows.

In turn the dollar has arrested its slide, logging modest gains against some of its major peers and gaining the most against the New Zealand dollar, NZDUSD falling around a third-of-a-percent.

Starting the new week near 0.5990, the Kiwi traded in a tight range through local trade, peeking above 60 US cents through the London morning. Modestly softening during overnight trade, NZDUSD fell circa 30pips to log Monday's lows a few pips through 0.5970.

Dating back to early August the pair has conspicuously ascended into a 0.6000/50 resistance zone on a half dozen occasions but has failed to extend beyond as the dollar asserted its dominance amidst a run of stronger than expected macro data.

We'll be closely monitoring this zone throughout the week to determine where the Kiwi may head through the final two months of the year. Given the subdued economic calendar, we suspect NZDUSD may consolidate last week's gains, logging a tighter weekly range between 0.5880 and 0.6020.

The action then likely steps up again next week following the release of the October US CPI report and other tier 1 data, including retail sales.

Shifting our focus back to the upcoming 24 hours, the RBA's interest rate decision presents as the day's headline event. Following an upside beat for 3Q AUS CPI, odds have firmed for a Melbourne Cup day hike - market pricing assigning a 50/50 split whilst 28 of 39 economists polled by Reuters have backed a 25bps hike to 4.35%.

New RBA Governor Michelle Bullock may take the opportunity to send a message regarding her inflation fighting credential aligning with the consensus outcome.

Given the hike is expected, risks are skewed to the downside for the Australian dollar. In the event that Bullock and her fellow board members refrain from ending the four-meeting pause, AUDUSD would plunge back down into the mid to low 0.64's.

Having fallen close to 3% from its early October swing high above 0.94, NZDAUD found support in the 0.9130's last week, rebounding back through 0.92.  A critical support zone has formed at 0.9130/60. Should the RBA deliver a hawkish 25bps hike, sending the pair below this zone, expect a path to emerge for the antipodean cross to trade sub-0.90 sometime in late 4Q, early 1Q.

The RBA will release its latest set of quarterly forecasts in Friday's Statement of Monetary Policy.

Regionally, the release of China's Trade Balance data is also on the radar.

Fed speakers to be the focus during overnight trade given the absence of tier 1 data releases.

One expected outcome for this week is for the long end of the yield curve to stabilise following last week's capitulation, entering a year-end range trading phase, consolidating near October's cycle highs. If this outcome prevails, the New Zealand dollar likely won't extend too far beyond 60 US cents, conceivably ranging between 0.5880 and 0.6020. 

Local importers should mull incremental hedging decisions at these levels.

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