Despite US treasury yield rebound, US dollar weaker against all major peers. DXY falls below 200d MA, on track for largest MoM decline in 12 months

By Stuart Talman, XE currency strategist

Despite rising bond yields, the US dollar has continued to weaken into the week's close as US markets traded an abbreviated session following the Thanksgiving Day holiday.

The dollar has endured a bruising sell-off throughout November on the view the Fed has completed its tightening cycle and will pivot to delivering multiple rate cuts, expected to commence late in the first half of 2024. Logging a weekly close below the 200-day moving average for the since August the dollar index (DXY) is on track for its largest monthly decline in 12 months. 

In turn, US equity markets and other risk sensitive assets have benefitted, the S&P500 and Nasdaq staging one of its most rapid 10% rallies in history, achieving the move in only 16 and 11 days respectively. Both gauges are on track for the largest monthly gains in close to 18 months.

The New Zealand dollar has been one of the strongest performers amongst the G10 cohort during this period, climbing close to 4½ percent. Adding just shy of half-a-percent through Friday's sessions, the Kiwi ended the week near 0.6080, its highest weekly close since the last week of July.

Located in the 0.6090's, the 200-day moving average will be tested this week, as will the mid-point (0.6092) of the July to October sell-off.

A decisive break above would be a big deal for NZD bulls.

So, will the dollar continue to weaken or has the bottom of the range been reached ahead of a rebound?

The answer will come from the incoming macroeconomic data flow, although like last week, a light US calendar presents.  

Personal consumption expenditure (PCE) and the ISM Manufacturing PMI are the sole tier 1 data points, the former unlikely to provide any new developments on the inflation front following the week before last's 0.1% CPI miss. And it’s the ISM Services PMI, rather than the manufacturing reading that typically elicits a more pronounced reaction given the service sector accounts for a significantly larger proportion of overall economic activity.

The ISM Services PMI drops the following week (w/c 04 DEC.), alongside the US employment report for November (released 08 DEC.).

We're therefore likely to get a better read on the dollar's next key directional move, next week.

In the interim, expect further dollar weakness, NZDUSD to explore levels above 61 US cents.

Other key events for the week ahead include retail sales across the Tasman, eurozone CPI, China PMIs and GDP for Canada.

The headline local event is the RBNZ's interest rate decision on Wednesday afternoon, Governor Orr and his colleagues universally expected to maintain an 5.50% OCR. 

The RBNZ has kept the main policy rate on hold since May, maintaining the view that the current level is sufficiently restrictive to continue to cool the economy and return inflation to the 1%-3% target band. The annual rate of inflation fell from 6% to 5.6% in the September quarter.

Recent data has been mixed with the softer-than-expected CPI and 3Q Labour Cost Index supportive of the bank's sufficiently restrictive view. Unlikely to deviate from their current medium-term forecasts (growth, unemployment and inflation), the challenge for the RBNZ (like most major central banks) is to moderate the market's expectations for the pace of monetary easing in 2024.

The past for the Kiwi in the week ahead - we anticipate NZDUSD piercing above the 200-day moving average, with expected resistance in the 0.6120/70 region.

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