Hushed start as the market slips into wait-and-see mode ahead of US CPI. US bond yields bounced late last week following ugly 30-year note auction

By Stuart Talman, XE currency strategist

Condensed range trading has ensued in a subdued start to a week that delivers October consumer price index data for the US economy. Released during Tuesday's US session, CPI in addition to retail sales data loom as crucial inputs into the Fed's late-cycle decision making process.

Upside data beats would lead the market to doubt the base case that July's hike to a 5.25% - 5.50% Fed funds target rate was the last of this cycle, causing yields to rip higher and the three major US equity markets to reverse their impressive gains of the past two weeks.

A CPI and/or retail sales miss could set the scene for a seasonal rally that propels risk sensitive assets higher through the closing stages of the year.

Following a challenging period, the week prior in which the New Zealand dollar was a notable underperformer (falling close to 2%), the Kiwi has commenced this week on the backfoot, albeit logging a marginal intraday loss.

Having peaked above 60 US cents on 06 November, NZDUSD has logged intraday losses through six consecutive days, pulling back to the midpoint of the rebound that commenced off the 26 October year-to-date low, marked a few pips above 0.5770.

With price action continuing to converge in a downtrend channel following the 03 November false breakout (ultimate rejection of 0.60), the technicals are flashing downside signals, suggesting NZDUSD may retest sub-0.58 levels.

In addition to this week's high profile macro data releases, the path for US treasury yields will also dictate whether the dollar index feeds back into the upper realms (106.50+) of the prevailing consolidation range, in turn putting more downward pressure on the Kiwi, or drops below key support (sub-105.00).

Last week's horrendous 30-year note auction (FRI. morning) in the US stood out amidst a quiet data week, poor demand for the Treasury's debt issuance requiring a higher yield to entice investors. As a result, the yield on the benchmark US 10-year note leapt from around 4.55% through 4.65%.

US yields have tracked higher to star this week, the 10-year falling just short of touching 4.70% before easing back through 4.65%.

November started with an aggressive pullback from north of 4.90% through 4.50% as both softer than expected US data (notably PMIs and nonfarm payrolls) and Powell's somewhat dovish FOMC presser ended bond yield’s eye-watering ascent.

Should the 10-year yield extend through 4.70%-4.80% this week, the obvious catalyst being a worryingly hot CPI report, the impressive rebound in US equities will evaporate as the dollar looks to re-establish its ascendancy.

So, what to look out for in this evening’s US inflation numbers?

Core CPI is expected to rise 0.3% month-on-month in October, delivering an annualised rate at 4.1%. From June, monthly readings for core inflation have printed at 4.8%, 4.7%, 4.3% and 4.1%.

To place a simplified, binary expectation on the outcome, a reading of 4.2% and above would likely induce USD buying as yields rip higher and US equities lurch to the downside. Conversely annualised core CPI at 4% or lower opens a path for the dollar index to plunge below 105.00 support, enabling the Kiwi to re-establish a foothold above 59 US cents ahead of a potential re-test of 0.6000.

Other market moving events through Tuesday include the UK employment report and the next preliminary reading of 3Q eurozone GDP. The constant flow of central bank speakers continues through this week, but likely to take a back seat to the tier data as far as influencing short term direction.

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