By Stuart Talman, XE currency strategist
Woah!
It's been a hectic 24 hours in financial markets, headlined by the Fed's dovish pivot bombshell, Jerome Powell and his colleagues converging with market expectations for 2024 monetary easing, the FOMC median dot plot projecting three quarter point cuts. The Fed's psyche has changed from debating whether the Fed funds target rate is sufficiently restrictive to now considering the timing of the first cut.
US treasury yields got pumped, the 10-year note yield ripping below 4.00%, falling to its lowest level since late July, fuelling a sell the dollar, buy everything else rally.
From Wednesday's low to Thursday's high, the New Zealand dollar gained around two-and-three-quarters percent, rocketing from below 61 US cents to touch 0.6250, its highest level since 27 July. Gains have been pared through the offshore sessions, NZDUSD retracing to range between 0.6190 and 0.6220.
The central bank action continued overnight, both the Bank of England and European Central Bank delivering universally expected on-hold decisions, but, unlike the Fed, chose to push back against the market's aggressive expectations for 2024 monetary easing…..more on this to follow.
On the regional data front, a domestic GDP shocker followed by a strong Aussie jobs report has induced a notable drop for the Kiwi versus the Aussie, NZDGBP plunging below 0.9300 to mark intraday lows a couple of pips south of 0.9250. Mid last week, the antipodean cross peaked near 0.9380 following the RBA's balanced on hold decision.
Thursday's trans-Tasman data mix may prove the catalyst to push the pair back into the lower bound of a 0.9160 to 0.9400 range that has contained much of the past 5 month's NZDAUD price action.
Yesterday's GDP data recorded the New Zealand economy contracted -0.3% in the September quarter, significantly weaker than the consensus forecast of +0.2% growth. In addition, the second quarter was revised down from +0.9% to +0.5%, indicative of a notable slowdown in economic activity over the past 6 months.
The data is at odds with the RBNZ's hawkish hold on the 29 November in which the MPS forecasted a higher track for the OCR, suggesting that a new year hike may be in play should inflation levels fail to fall further.
However, should the trend of weakening economic growth continue into 2024, the RBNZ will follow the Fed's lead, shifting its focus from late-cycle additional tightening to the timing of the first OCR cut.
Having pulled back to the mid-point of the early November to early December rally, touching both the 100 and 200-day moving averages, we suspect NZDAUD price action will further extend below the widely monitored trend following indicators to test major support around 0.9160 in the new year.
Across the Tasman, the Australian economy added 61.5K new jobs (vs 11K, expected) whilst the participation rate hit a record high, causing the unemployment rate to tick higher from 3.8% to 3.9% (vs 3.8%, expected).
The next Aussie jobs report is released on 18 January, whilst 4Q CPI drops on 24 January, the same day as the domestic CPI release. These data points will be critical inputs for the RBA's decision-making process, determining whether Governor Bullock and her colleagues unleash additional monetary tightening at the first RBA meeting for 2024, on 06 February.
Turning our attention back to overnight central bank decisions.
Firstly, the Bank of England…..the key takeaways:
- BoE delivers on-hold decision, maintaining 5.25% bank rate
- Vote split: 6-3 in, on-hold vs 25bps hike
- Maintains guidance: restrictive rates for an extended period
Given the last BoE meeting of the year was not scheduled to deliver updated economic forecasts nor a press conference from Governor Bailey, the focus was on the vote split and the accompanying statement.
Not much has changed from the November meeting - once again the vote was 6-3 in favour of no-change whilst the accompanying statement maintained the same forward guidance, repeating that:
Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit. As illustrated by the November Monetary Policy Report projections, the Committee continues to judge that monetary policy is likely to need to be restrictive for an extended period of time.
There was some thinking that one or two of the remaining hawks would shift to a no-change vote…therefore the market viewed the meeting through a somewhat hawkish lens given both the vote-split and the statement implying the BoE has not yet shifted to a peak rate outlook.
The pound was one of the stronger performing currencies, gaining over one percent versus the dollar.
Ascending to a ~6 month high a couple of pips shy of 0.4940 through Thursday, NZDGBP reversed course through the London morning, extending its pullback following the release of the statement, the pair's slide halted around 0.4860.
Having formed a double top at 0.4930 in late September, early October, stout resistance has formed at 0.4930/40, NZDGBP likely to consolidate gains and range trade between the mid 0.48's and 0.4940 as more subdued trade evolves through the holiday break.
To the ECB, the key takeaways from the final meeting of the year:
- ECB delivers on-hold decision, maintaining 4.00% deposit rate
- Announces conclusion to PEPP, phasing out by 2024-end
- Revises down inflation forecast
The decision and statement followed the expected script, with the notable announcement being the phasing out of the Pandemic Emergency Purchase Programme (PEPP) by the end of 2024. There were some important changes to the accompanying statement including the omission of the previous statement's reference to inflation remaining too high for an extended period.
However, like the BoE, the ECB statement retained the higher for longer mantra via rates will be set at sufficiently restrictive levels for as long as necessary.
During her presser, ECB President Lagarde chose to push back against the market's aggressive expectations of 150bps of cuts in 2024, confirming the governing council did not discuss rate cuts. And like the RBNZ, the ECB are also closely monitoring domestic (non-tradeables) inflation as upside wage pressures continue to sustain persistently high levels.
Whilst its rational to conclude peak rates are in place, it’s clear from today's meeting that the ECB and the market are misaligned when it comes to the expected path for policy through 2024.
The euro followed a similar path to the pound, gaining over 1% against the dollar.
Major NZDEUR resistance is located in the 0.5720's, a mark the pair has been unable to extend through on multiple occasions through the first half of December. Four of the past seven trading days have delivered intraday highs in the 0.5720's with Thursday's pullback the most pronounced, NZDEUR falling circa 90 pips, through 0.5640.
We suspect the pair will also consolidate the past four week's gains through the holiday period, price action likely to be contained in a 0.5600 - 0.5700 range during the break.
Turning our attention to the day ahead, the week's busy economic calendar continues to deliver tier 1 macro data, Friday presenting S&P Global PMIs for the UK, eurozone and US economies.
Regionally, the focus will be on activity data out of China, industrial production and retail sales numbers released.
Given the sizeable moves of the past 24 hours, it would not surprise if we observed more subdued price action to end the week.
The Kiwi to trade either side of 62 US cents.
Stuart Talman is Director of Sales at XE. You can contact him here.
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