Risk assets have ended the week on a high note, with much of the market's headlines focused on the S&P500 closing above the 5000 mark for the first time ever as market participants back the soft landing outcome - the Fed will return inflation to targeted levels without sparking a sustained downturn in economic activity.
The broader (relative to the Nasdaq and Dow) S&P500 index is the yardstick for US economic health and sentiment. With around 70% of Americans invested in US stocks, a surging S&P500 boosts consumer confidence, assisting in sustaining above trend levels of economic growth.
Astoundingly the S&P500 has logged week-on week gains in 14 of the past 15 weeks, currently on its strongest run in over 50 years.
Risk sensitive currencies, including the New Zealand and Australian dollars can benefit from periods of US equity market strength given they're regarded as barometers for global growth. When the market's mood is buoyant and global equity indices march higher, the Kiwi and Aussie typically outperform.
However, this has not been the case through the early stages of 2024.
Despite the S&P500's 5%+ gain and the Nasdaq charging higher by almost 7%, NZDUSD is down -2.78%, year-to-date whilst AUDUSD sheds over -4%.
US economic exceptionalism, that is, the strong run of macroeconomic data for the world's largest economy has been one factor that has driven the dollar higher from late December. Strong jobs numbers, impressive PMIs and other activity data surprising to the upside has induced the market to dial back the speed and magnitude of Fed easing through 2024.
In early January, rates markets priced in 6-7 25 bps cuts, the Fed projected to commence easing at the 20 March FOMC meeting.
Now, the timing of the first cut has been pushed back to 01 May, Fed Funds futures assigning a near 50% implied probability the target rate is lowered to 5.00% - 5.25%. Around 4½ cuts (~112 bps) of accumulative easing projected.
In addition to the dollar's impressive rebound, the other major headwind for the antipodeans: prevailing concern regarding the state of China's economy and the growth outlook.
The data flow continues to disappoint whilst stimulatory policy responses underwhelm.
However, despite more soft China data (Caixin Services PMI and CPI misses) this past week, the New Zealand dollar's week-on-week advance of +1.39% lead its G10 peers, the bulk of the week's gains materialising during Friday's sessions.
Commencing Friday's local session below 61 US cents, the Kiwi was propelled higher during the Asian morning following the release of a research note from ANZ, the nation's largest bank revising its projected OCR track, calling for the RBNZ to hike in both February and May to lift the OCR to 6%.
A bold call, the ANZ team sighted the undesirable data flow to start the year:
We would characterise the data since November as a cumulation of small but unwelcome surprises. None of them are game changers, but given the starting point was the RBNZ already very nearly over the line to hike again, no game changers are needed. If the RBNZ raises its forecast OCR track even the tiniest smidgen, then their conclusion will be that they should hike.
It's worth noting the ANZ team released a note on 18 January titled:
OCR call change – first cut now penciled for August, opening with:
We now expect the RBNZ to deliver a steady sequence of 25bp OCR cuts starting in August, taking the OCR to 3.5% over 12 months.
Whilst there are pockets of macro data that will concern the RBNZ that inflation may refuse to return to target within the projected timeframe, there are also signs that the economy continues to cool.
Unless key inflation and activity reads track higher over the coming weeks, Governor Orr and his colleagues will likely be delivering on-hold decisions at the 28 February and 10 April meetings, maintaining a 5.50% OCR.
Following the release of ANZ's note, the Kiwi leapt back through 61 US cents, bid steadily throughout afternoon trade and into the London morning. Gains were consolidated through US trade, NZDUSD ending the week near 0.6150.
Heading into the start of last week we commented:
The 100-day moving average will be the first important test, the widely monitored trend following indicator currently located in the 0.6050's.
Below, the 61.8% Fibonacci retracement of the October to December upswing resides at 0.6001.
We suspect the pair may find support within this region given both the magnitude of the retreat from the 28 December high near 0.6370, and the relatively quiet week ahead.
Ultimately, the 100-day moving average held up last week, NZDUSD basing a couple of pips below 0.6040 to ascend back into the 0.6060 - 0.6160 range that has captured most of the past 18 trading days price action.
Focus now turns back to the upper bound of the prevailing range, 0.6140/70 a critical resistance zone for the Kiwi to move beyond to shift the short to medium term bias from neutral to bullish.
We'd need to see price action move decisively through 62 US cents for confirmation that NZD bulls are willing to initiate a new swing higher.
Against the other majors, the Kiwi gained over 2% versus the JPY, with week-on-week gains between +1.28% and +1.46% against AUD, EUR, GBP and CAD…. a solid week indeed for the New Zealand dollar.
The catalyst for the notable NZDJPY outperformance, comments from BoJ Governor Ueda and his deputy Uchida through Thursday and Friday that lifting the policy rate out of negative territory won't necessarily usher in a period of sustained monetary tightening.
Having chopped sideways between 89.70 and 91.00 to start the year, NZDJPY has broken to the upside, Friday's highs marked in the 91.80's, fresh 8½ year highs.
The next key hurdle for the pair to clear, the April 2015 high near 92.40.
Should USDJPY extend beyond 150.00 (closed through 149.20), Japan's ministry of finance may commence intervention protocols.
Looking to the week ahead, the main event is US CPI for January - headline inflation projected to print at 3% whilst core is expected to ease from 3.9% to 3.8%. Should the headline rate miss to the downside, it will be the first sub-3% reading since February 2021.
Other US events of note include retail sales, producer prices, Michigan consumer sentiment. Fourth quarter earnings season (which has been stronger-than-expected) and the procession of Fed speakers continues.
It’s a big week for UK data the latest reads on the labour markets, CPI and GDP will be scrutinised to influence the outlook for the Bank of England's next move. Market pricing projects 3 x quarter point cuts from the BoE, almost 100 bops less than what was discounted late last year.
GDP for Japan and Aussie jobs numbers also in focus.
It’s a quiet week for local data releases, the RBNZ's inflation expectations survey, Tuesday the domestic headliner.
Technicals suggest that NZD bears are unwilling to explore levels closer to 60 US cents, so if the Kiwi can reclaim territory north of 0.62 this week, we may be witnessing the end of the dollar's early year dominance.
That being said, the dollar likely remains supported on the US exceptionalism trade, therefore we back a scenario whereby NZDUSD establishes a higher range between 0.6100 and 0.6250 rather than commencing an aggressive swing higher.