By Stuart Talman, XE currency strategist
Heading into the final month of 2023, the market sets-up to deliver a fierce year-end rally following one of the strongest November's of the past century, the S&P500 climbing in 16 of the past 20 trading days. Propelled over 10% higher from the 27 October swing low on the view the Fed is now done, the S&P500 has entered technical overbought territory.
So, now the question begs: will December add to November's gains, or will the equity bulls halt their charge to take profit?
Should the risk-on vibes be sustained into the holiday break, the New Zealand and Australian dollars will continue to outperform amongst the G10 cohort. Climbing around four-and-three-quarters percent over the past month, the Kiwi claims third spot on the G10 leaderboard during this span, outpaced by the Norwegian krone (+4.89%) and Swedish krona (+6.58%), the latter largely benefiting from Riksbank hedging activity.
The answer to the question above will likely come via upcoming key data releases out of the US - the November jobs report released on 08 December, followed by CPI, dropping 12 December.
Should annualised core inflation fall below 4% whilst the labour market continues to cool in an orderly fashion, market participants backing a soft landing will continue to participate in the fourth quarter risk rally.
Via this scenario, the Kiwi can extend its rebound from the 26 October low, below 58 US cents, regaining a foothold in the 61 to 63 cent range that contained the majority of NZDUSD price action from mid-February to mid-July.
The alternative path is a resumption of the hot run of US macroeconomic data observed through the September quarter, or at the very least, a noticeable pause in the disinflation journey.
Should consumer prices fail to fall further over the next couple of months, the market will strip out a portion of the ~90bps of Fed easing priced in for next year, inducing a rebound in US treasury yields and the dollar.
As the market keenly awaits next week's US employment report, the dollar will likely retain a mild downside bias given this week appears light on directional catalysts.
Commencing the new week a few pips south of 0.6080, the New Zealand dollar has ranged between 0.6060 and 0.6100, logging an intraday gain of around a third-of-a-percent.
The widely monitored 200-day moving average is the focus to start the week as NZDUSD has not traded above the trend following indicator since late July. Price action finding fresh support above would be a compelling development for the Kiwi dollar bulls, tipping the balance in favour of further NZDUSD upside as we head into the new year.
A decisive break above 61 US cents is required……Monday's intraday highs marked a few pips through 0.61.
On the downside, an old resistance zone at 0.6000/50 forming new support also indicates the path of least resistance is currently higher. Following a brief pullback below 60 US cents midway through last week, NZDUSD easily punched through the upper bound of this zone before ascending through 61 US cents for the first time in 3½ months.
An obvious upside target for the Kiwi to ascend to: 0.6168, the 61.8% Fibonacci retracement of the July/October sell-off.
Given the mix of slowing bullish momentum for US equities and US treasury yields tentatively basing, we suspect NZDUSD will struggle to reach beyond 0.6168 whilst the market awaits Friday week's jobs numbers.
Shifting the focus back to the upcoming 24 hours, the headline regional event occurs across the Tasman - retail sales released for October. Following a robust +0.9% growth in household spending in September, which is shaping up to be transitory, a significantly weaker growth rate of +0.2% is projected.
A retail sales beat followed by a hot monthly CPI read, tomorrow would add to the case for the RBA to hike at the first meeting for 2024, held on 06 February. Market pricing currently favours one final 25bps hike for this cycle, lifting the peak cash rate to 4.60%.
Price action for the antipodean cross has been converging in a pennant pattern over the past few weeks, suggesting a break-out may be imminent. Ranging between 0.9190 and 0.9280 during the past dozen trading days, NZDUSD short term bias is currently neutral.
A decisive break below a 0.9160/90 support zone followed by the 01 November swing low near 0.9130 likely paves the way for the pair to re-test sub-0.90 levels in the new year should the RBA flag additional tightening.
RBA Governor Michelle Bullock will be participating in a panel discussion in Hong Kong this afternoon, but given last week delivered both RBA minutes and a Bullock speech, the RBA governor is unlikely to provide any fresh insights into the board's psyche and near-term path for the cash rate.
A flurry of other central bank speakers will follow Bullock throughout Tuesday's sessions.
We favour modest upside for the Kiwi, extending its run of consecutive daily gains into a fourth day, exploring territory in the low 0.61's.
Stuart Talman is Director of Sales at XE. You can contact him here.
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