By Stuart Talman, XE currency strategist
A solid Bureau of Labor Statistics (BLS) employment report induced choppy price action through US trade, the end result: a higher dollar as US treasury yields bounced for a second day whilst the three major US equity markets overcame early session losses, rallying into the week's close to mark intraday gains around four-tenths-of-a percent.
Shedding over three-quarters-of-a-percent, the New Zealand dollar was the weakest performer amongst the G10 cohort, falling from near 0.6150 prior to the release of the jobs numbers, plunging to within a few pips of 61 US cents in the hour following the stronger-than-expected data. In see-sawing trade, the pair rebounded back through 0.6140 before weakening again through the New York afternoon.
Closing a few pips below 0.6120, the Kiwi fell -1.39% for the week, claiming the third-to-last position on the G10 leaderboard. The Australian dollar (-1.42%) and Norwegian krone (-2.10%) outpaced the Kiwi's weekly decline.
Against its other major peers, the NZD's largest weekly decline was marked against the JPY as the market ratcheted up expectations of a hawkish year-end BoJ policy tweak, NZDJPY falling -2.59%. The Kiwi fell -0.34% versus the euro and -0.15% against the pound whilst eking out a marginal week-on-week gain against the AUD.
The bearish end to the week, has seen the formation of an NZDUSD swing-high a few pips north of 0.6220. Following the early-week apex, NZDUSD price action was mostly contained between 0.6120 and 0.6200 with resistance forming between 0.6170/90 through the second half of the week.
The Kiwi, and other risk sensitive assets had charged higher through November and the first full week of December on the view the Fed was not only done hiking but would pivot to a first cycle-cut as early as March with around 5x 25bps hikes priced through 2024.
During this span, the yield on the benchmark US 10-year note plummeted from north of 4.90% to last week's swing low near 4.10%.
Too far, too fast?
Friday's data and the market's reaction suggests this is the case.
The US economy created 199,000 jobs through November (vs 185K, expected) whilst the unemployment rate unexpectedly fell to 3.7% (vs no change: 3.9%, expected) despite a modest rise in the participation rate.
At its peak dovishness last week, rates markets priced in around 140bps of Fed easing, assigning an implied probability of circa 65% the first 25bps cut would be delivered in March. Following the BLS data odds dropped to around 50% with the first cut fully priced in for the May meeting and ~110bps accumulative easing through the year.
Fed Chair Jerome Powell and his FOMC colleagues will feel vindicated by the data given their message has been clear in recent weeks: it's too premature to be thinking about rate cuts and the Fed funds target rate is likely be held at its peak for a prolonged period.
Will the market continue to concede ground this week to more closely align with the Fed's thinking?
A mammoth week delivers both CPI (TUES.) and the final Fed interest rate decision for the year (WED.).
Core inflation for the US economy is expected to remain unchanged at 4.0% (annualised) whilst headline declines further from 3.2% to 3.1%. The CPI outcome will have no bearing on the December FOMC decision but will have ramifications for the Fed policy during 1Q, 2024.
An upside CPI beat will induce the market to further strip out expectations for 2024 monetary easing, pushing back the timing of the first cut, whilst soft inflation numbers will fuel a year-end risk rally as market participants back calls for the target rate to be cut below 4% by the end of next year.
Regarding the FOMC decision, the unanimous prediction calls for the Fed Funds target rate to remain unchanged at 5.25% - 5.50%. Along with the statement and Powell's presser, the latest set of economic projections will be released.
In a big week for central bank meetings, the Bank of England and European Central Bank convene, both expected to also deliver on-hold decisions.
The Kiwi formed a double bottom against the euro at the late October and mid-November lows before rebounding over 4.5% during the past few weeks. Resistance appeared near 0.5720 last week, the final three days of the week all delivering intraday highs within a few pips of this mark.
Likewise, against the pound, the Kiwi rebounded from a double bottom reversal pattern, NZDGBP climbing just shy of 3% during this span.
The New Zealand dollar looks well placed to extend higher against both currencies given rate cuts from the BoE and ECB are expected to occur earlier in 2024 relative to the RBNZ.
Other key risk events for the week ahead include UK and Aussie jobs numbers, US retail sales, S&P Global PMIs and industrial production and retail sales for China.
Locally, the headline event is 3Q GDP, the domestic economy projected to expand 0.2% through the September quarter.
Also of note, the US treasury department holds a 30-year bond auction.
Why is this important?
Last month’s was an absolute shocker, resulting in a higher average yield required to incentivise investors. In turn, this caused the yield curve, particularly at the long end to ratchet higher, supporting the dollar.
Another poor auction in conjunction with an in-line or hot CPI could see the re-emergence of dollar bulls.
It promises to be an action-packed week.
We feel technicals have shifted such that the dollar may continue to rebound through this week….if this proves correct, NZDUSD to fall below 61 US cents and test levels south of the 200-day moving average, currently located near 0.6080.
Stuart Talman is Director of Sales at XE. You can contact him here.
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