By Stuart Talman, XE currency strategist
Has inflation in the US bottomed?
That's the question market participants were left with following hotter-than-expected producer prices (PPI) data on Friday following on from the CPI beat earlier in the week.
Projected to fall from an annualised rate of 1.7% to 1.6%, core PPI climbed back to 2%, logging its largest monthly (0.5% MoM vs 0.1%, expected) increase in six months following a decline in December.
With inflation data surprising to the upside across the board, last week, the disinflation narrative is looking suspect, compelling some analysts to flag the potential for the Fed's next move to re-commence tightening rather than initiate a cycle of a lower Fed funds target rate.
Perhaps we are entering a new phase whereby core CPI settles in a 3%-4% range whilst PCE (the Fed's preferred gauge) fails to fall below 2%, tracking back towards 3%.
This would be too high for the Fed's comfort.
Heading into 2024, the market assigned close to a 100% probability the Fed would be cutting in March. Now, both the March and May FOMC meetings present as on-hold outcomes, Fed funds futures assigning around a 1-in-3 probability to a 25 bps cut on 01 May.
When the Fed next releases its dot plots at the 20 March FOMC meeting, considerable attention will be given to the median expectation for the number of rate cuts. Fed officials may choose to dial back the amount of 2024 easing via a median dot plot that projects 2 cuts, down from January's projected 3 quarter point cuts.
If this is the path ahead, the dollar will continue to outperform its G10 peers.
Despite the upside PPI surprise, which propelled the yield on the benchmark US 10-year note beyond 4.30%, the dollar failed to capitalise, the dollar index (DXY) again proving unwilling to extend beyond 105.00.
A weighted measure of the dollar's value against six major currencies, the DXY has jumped over 4% from late December, bid from below 101.00 to within a few pips of 105.00 during this span.
A run of stronger than expected US macroeconomic data in addition to the abandonment of March Fed rate cut expectations, has fuelled the dollar's strong start to the year.
The US economic exceptionalism narrative was in full display last week, as the latest reads on GDP for the UK and Japan confirmed these two major economies fell into a technical recession in the fourth quarter, yielding annualised growth rates of -0.2% and -0.4% respectively.
Referencing the Atlanta Fed's widely followed GDPNow forecasting tool, the latest estimate of annualised growth in the world's largest economy is at a healthy 2.9%.
Simply, the US economy is performing significantly better under the weight of higher borrowing costs relative to other developed nation's economies.
Sitting atop a condensed G10 leaderboard, the New Zealand dollar added around three-tenths of a percent through Friday's sessions, to close the week near 0.6120. It was the third consecutive intraday gain for the Kiwi, rebounding from Tuesday's US CPI induced sell-off, the week's lows marked at 0.6050.
Despite the three-day rally, NZDUSD remains firmly entrenched in a 23 day trading range that constrains price action between 0.6040 and 0.6170.
For the week, the Kiwi shed around one-third-of-a-percent versus the dollar.
Against the other majors, NZD logged its largest weekly gain versus the embattled yen, NZDJPY climbing just over a quarter-of-a-percent to trade through 92.00 for the first time since April 2015.
Weak data out of Japan, dovish comments from BoJ officials and more broadly, rising global yields contributed to the yen's weakness.
With USDJPY ascending back above 150.00, yen intervention expectations are climbing, with some market participants calling for the Ministry of Finance to intervene should the pair trade through 152.00.
The next major upside target for NZDJPY is the April 2015 high, located near 92.40.
The Kiwi's worst performance for the week occurred against the Aussie, NZDAUD shedding around half-a-percent, losing topside momentum below major resistance near 0.9450 to end the week near 0.9370.
The Kiwi also fell versus CAD (-0.11%), GBP (-0.16%), and EUR (-0.33%).
So, what will potentially shape near-term direction this week?
The release of minutes from the 31 January FOMC meeting and numerous scheduled speeches and interviews from fed officials will be scrutinised to further shape expectations for the path of fed policy in the months ahead.
Its looking increasingly likely the Fed won't be cutting until after the northern hemisphere summer.
Tues 1 data points this week include CPI for Canada, S&P Global PMIs for the UK, eurozone and US and locally, 4Q retail sales is the headliner.
US fourth quarter earnings season continues - market darling, Nvidia the highlight. US equity markets have had a great start to the year because tech is doing well. Nvidia's strong performance is core to the tech rally.
Following last week's Lunar New Year holiday, the re-opening of China's financial markets will also be closely watched as expectations for additional stimulus announcements grow.
Can the New Zealand dollar break-out of its prevailing 23-day range?
We suspect the choppy price action sustains for another week - NZDUSD upside capped in the mid to high 0.61's whilst the mid to low 0.60's halts downside momentum.
Stuart Talman is Director of Sales at XE. You can contact him here.
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