By Stuart Talman, XE currency strategist
Friday's US session was punctuated by choppy trade, the US dollar falling earlier in the session as producer prices in the world's largest economy unexpectedly fell providing further ammunition for the inflation doves who favour a Fed rate cut as early as March.
Range trading mostly between 0.6225 and 0.6255 throughout Friday's local session and into the first half of European trade, the New Zealand dollar ratcheted higher following the release of the PPI data, marking highs for the week a couple of pips shy of 0.6280.
However, the 0.6270/90 region again provided stout resistance, NZDUSD reversing course later in the New York morning as the geopolitical newsflow soured, newswires reporting US and UK forces launched fresh strikes against Yemen's Houthi rebels, heightening fears of a more widespread conflict in the Middle East.
The New Zealand dollar and other risk sensitive assets pared gains, NZDUSD shedding ~40 pips to end the week near 0.6240, logging a marginal week-on-week gain.
Most of the week's NZDUSD price action was contained between 0.6220 and 0.6260 with US inflation data inducing a CPI induced spike below 62 US cents and a PPI induced spike into the 0.6270's.
Digesting the latest data on consumer and producer prices, the market continues to subscribe to the view the Fed may hike in March, rates markets assigning a near 80% implied probability the Fed Funds target rate is lowered from 5.25% - 5.50% to 5.00% - 5.25%.
Following the soft PPI data (-0.1% MoM, vs -0.1%, expected), year-end SOFR futures priced in over 160bps of monetary tightening, implying the Fed will deliver circa 7x 25 bps cuts through 2024.
The Fed, via its latest dot plots, released at the 13 December FOMC meeting, projected a median outcome of 3 quarter point cuts for the year ahead.
Given the labour market remains tight - at 3.7%, unemployment remains at historically low levels, and inflation is still elevated, it seems premature the Fed will cut the target rate in March.
The next key data input for Fed policy - core Personal Consumption Expenditures, released on 26 January. Friday's PPI miss has raised expectations for a soft PCE print, the Fed's preferred gauge projected to fall further towards 3% (from prior month's. 3.2%).
Turning our attention to the week ahead, it’s a holiday shortened week in the US with the Martin Luther King Jr. holiday, today. A quiet US calendar delivers retail sales and Uni. Of Michigan Consumer Sentiment.
Fourth quarter US earnings season will also be closely watched to determine the outlook for US corporates.
It’s a busy week for UK data releases - both the December employment report and CPI critical inputs for the Bank of England in determining the path for monetary policy. Current market pricing projects close to 120 bps of BoE easing through 2024, commencing in July.
Having marked a 7-year low in the 0.4630's in late August, NZDGBP rebounded over 7.5% through the final four months of the year, topping out in the 0.4980's on the penultimate trading day of 2023. The Kiwi has softened around 2% against the pound through the first two weeks of January, easing back below 0.4900.
The 200-day moving average and 38.2% Fibonacci retracement of the August to December rally are both located around 0.4850. Price action remaining above likely opens a path for the pair to initiate a fresh leg higher to test 0.5000.
Other data points of note this week include CPI for Germany and Canada, GDP, retail sales and industrial production for China and jobs numbers across the Tasman. The local calendar is absent any market moving events.
The Kiwi has chopped sideways over the past 8 trading days as the market attempts to decipher the timing and speed of the Fed’s and other central banks’ anticipated 2024 rate cuts. Given it’s a relatively quiet US docket, the week ahead may fail to produce the next key directional move.
On the upside, we focus on the 0.6270/90 resistance zone whilst on the downside a 0.6180 - 0.6220 support zone must be breached to confirm the NZDUSD bears are assuming control.
Stuart Talman is Director of Sales at XE. You can contact him here.
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