By Stuart Talman, XE currency strategist
Subdued price action was the state of play through Friday's sessions following Thursday morning's FOMC induced risk rally, the Fed's dovish pivot providing the greenlight for US equity markets and other risk sensitive assets, including the New Zealand dollar to ratchet higher.
Prior to the Fed interest rate decision and the release of the accompanying statement, summary of economic projections and dot plots, the New Zealand dollar spent the first half of the week ranging in the low to mid 0.61's.
At the week's apex, marked during the Asian afternoon, Thursday, NZDUSD touched 0.6250, a four-month high.
Throughout Friday, the Kiwi mostly ranged between the 0.6190's and 0.6220's with a notable ~40pip dip early in US trade, briefly trading back below 0.6180 before reversing the move to end an eventful week a few pips south of 0.6210.
The catalyst for the Kiwi's dip: comments from New York Fed President, John Williams. Via a CNBC interview, William's stated:
We aren't really talking about rate cuts right now. We're very focused on the question in front of us, which is-- as Chair Powell said -- the question is: Have we gotten monetary policy to a sufficiently restrictive stance to ensure that inflation comes back down to 2%.
William's tone was more hawkish, relative to Powell's FOMC presser in which the Fed Chair talked about the next stage of the cycle, dialling back that amount of policy restraint that's in place.
Bond yields and the dollar spiked higher during William’s interview, the market dialling back odds of an FOMC cut in March, Fed funds futures assigning a near 60% implied probability the target rate is lowered to 5.00% - 5.25% on 20 March.
Regarding cumulative easing through 2024, the market prices in circa 140bps of cuts.
The remainder of US trade was uneventful as most of the territory lost due to Williams comments, was reclaimed. The release of S&P Global PMIs failed to illicit a meaningful market reaction as manufacturing printed softer, falling from 49.4 to 48.2 (vs 49.3, expected) whilst services activity remains firmly in expansionary territory, climbing from 50.8 to 51.3 (vs 50.6, expected), the highest reading since July.
Eurozone PMIs both missed the mark, providing further evidence of the region's struggles. Contracting for the fifth consecutive month, the services PMI fell from 48.7 to 48.1 (vs 49.0, expected), indicative of a eurozone economy that is buckling under the weight of the ECB's tightening cycle.
The euro was the worst performer amongst the G10, falling close to nine-tenths-of-a-percent.
The Kiwi again located support in the 0.5630's versus the euro, climbing close to one percent in offshore trade to end the week near 0.5700. Month-to-date, NZDEUR price action has mostly ranged between 0.5640 and 0.5720 and likely to remain in the prevailing range as we head into thinner, holiday trade.
Looking to the week ahead, the headline event is the Bank of Japan's monetary policy meeting. No policy change is expected, despite comments from BoJ Governor Ueda and one of his deputies earlier in the month that suggested a policy tweak was nearing.
The yen was one of the better performing currencies, last week, climbing close to 2% against the dollar, benefitting from the backdrop of softer global bond yields.
Other events of note through a relatively quiet week include CPI for the UK and Canada, UK retail sales and core PCE, the Fed's preferred inflation gauge.
Unless the BoJ delivers a hawkish shocker, expectations are for relatively tight ranges this week, NZDUSD likely to range between the high 0.61's and mid 0.62's.
Stuart Talman is Director of Sales at XE. You can contact him here.
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