By Stuart Talman, XE currency strategist
Choppy price action has ensued following the release of mostly in-line US CPI data, with attention now turning to tomorrow's FOMC meeting and expectations that Fed Chair Jerome Powell will adopt hawkish language to push back against the view the Fed will deliver four to five 25bps cuts through 2024.
Month-on-month core inflation printed at +0.3% (as expected), up from the prior month's +0.2%, bringing annualised core inflation to 4%, maintaining last month's YoY result. Headline inflation came in at 0.1% MoM, slightly higher than the consensus for a flat (0%) reading, yielding an annualised headline inflation rate of 3.1%, down from 3.2% in October.
The immediate, knee jerk reaction: treasury yields and the dollar fell, the New Zealand dollar spiking from around 0.6150 to mark an intraday high at 0.6170. However, these moves were unwound in the hour that followed, the Kiwi shedding over 60 pips to fall a couple of pips through 0.6110 before paring losses heading into the New York afternoon.
Having caught a bid throughout the Asia afternoon, climbing from 0.6120 through 0.6160, the NZDUSD net change records a modest intraday gain.
The risk mood is improving as we round into the second half of US trade - the three major US equity indices climbing back into positive territory following a soft opening.
So, what to make of the latest set of consumer inflation numbers for the world's largest economy?
The inflation bears will sight the continued pullback, the baby step in November further adding to the narrative that peak rates are in as inflation continues to approach the Fed's 2% target. Disinflationary forces, whilst slow, remain prevalent.
The inflation bulls will reference core inflation remaining at 4% and that the hardest work is yet to come - the final push from 4% to 2% will require the Fed funds target rate to be held at its peak through much of 2024 as cutting prematurely risks igniting a second inflation wave.
It was a balanced CPI report that delivered validation for both sides of the argument and overall, does little to change expectations of the medium-term path for Fed policy.
Rates markets continue to price in between 110bps - 120bps of easing through 2024, assigning a near 50% implied probability the Fed delivers the first cut in March.
In yesterday's update we outlined the near-term resistance and support zones to monitor through this week to attempt to determine the New Zealand dollar's next key directional move. On the upside, a 0.6170/90 resistance zone remains untested with Tuesday's highs briefly touching the lower bound.
Heading into today's local session NZDUSD price action is likely to trade in a condensed range between 0.6110 and 0.6140 ahead of the Fed, and could test the monitored support zone (0.6090 – 0.6120) should the FOMC meeting deliver hawkish dot plots and a press conference in which Fed Chair Powell pours water in the market's expectations for considerable monetary easing through 2024.
Given the market is anticipating a hawkish tone from Powell, he'll have to step-up the aggression to shock market participants…..something he has failed to do on multiple occasions over the past 6months.
The market tends to shrug off any attempts by Powell to talk tough.
Perhaps we see a similar reaction to the CPI data - a volatility spike in the hour or so following the statement/dot plots/presser followed by an insignificant net change as the market realises that the status quo prevails.
In other news from Tuesday, UK jobs data has reported a modest fall in wages growth, average earnings excluding bonus pay falling from 7.4% to 7.3% (vs 7.4%, expected). The unemployment rate remains steady at 4.2%.
Market pricing calls for the Bank of England to deliver three 25bps rate cuts next year, the timing of the first around mid-year. The BoE interest rate decision drops on Thursday evening - widely expected to maintain a 5.25% bank rate.
Like Powell, BoE Governor Andrew Bailey may push back against the market, reiterating the higher for longer approach required to return inflation to targeted levels.
The Kiwi eked out a marginal gain against the pound, NZDGBP continues to consolidate the past few weeks measured advance, mostly ranging between 0.4860 and 0.4900 through the first two weeks of December.
The pair is attempting to regain a foothold above the 200-day moving average. Should it succeed, a path opens to test the 10 October swing high at 0.4930. Having formed a double top at this level in late September, early October, a topside break would be an important development for NZD bulls, suggesting a prolonged run higher.
The day ahead is all about the FOMC meeting, although tier 1 data is released out of Japan via the Tankan Large Manufacturing Index, a measure of business activity amongst Japan's larger factories.
Not surprisingly, following last week's JPY/JGB yield upside propulsion on the back of somewhat hawkish BoJ comments raising expectations for a policy tweak at next week's meeting, BoJ officials have poured water on the rate hike fervor, commenting that wages growth needs to quicken before negative rates are abandoned.
Last week NZDJPY spiked down from around 0.9050 through 87.70 following the comments, before reversing half of the fall over the past three trading days, trading between 89.00 and 89.60 through Tuesday.
An overtly hawkish FOMC meeting would continue the JPY retracement.
Where will the Kiwi be trading post-FOMC?
There is a sense the bar is set a little too high for Powell and his colleagues to deliver a hawkish surprise, yet he will be wary to avoid delivering comments that fuel a risk-on wild fire.
A balanced statement, summary of economic projections/dot plots and press conference the likely outcome……NZDUSD to continue to trade between 61 and 62 US cents.
Stuart Talman is Director of Sales at XE. You can contact him here.
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