By Stuart Talman, XE currency strategist
A quiet start to the week has seen risk sentiment lean mildly negative - the three major US equity markets unwilling to extend last week's gains whilst risk sensitive currencies lag, the New Zealand and Australian dollars occupy the bottom two spots on the G10 leaderboard.
One of the strongest performers, last week, gaining around 1.2% to mark swing highs a couple of pips shy of 0.6220, NZDUSD shows signs of topside exhaustion. Monday's decline ended a run of 8 consecutive intraday gains, the Kiwi rallying close to 3% off the 14 February low near 0.6050.
Commencing the new week near 0.6190, NZDUSD was offered throughout the first half of local trade, falling into the low 0.6160's. The Kiwi's soft start has been maintained through offshore trade, logging an intraday loss of around a third-of-a-percent.
Given the absence of an obvious catalyst for the Kiwi's underperformance, the failure to hold levels above 62 US cents may be due to positioning ahead of the RBNZ's monetary policy meeting, Wednesday.
The meeting presents as a live one, market pricing assigning an implied probability in the region of 20-30% for a 25 bps hike, whilst 2 of 21 polled economists (by Bloomberg) predict the OCR will be raised to 5.75%.
Given the RBNZ's recent hawkish language, persistently high non-tradeables (domestic) inflation, robust net migration and a strong 4Q jobs report, Governor Orr and his colleagues are, at the very least expected to deliver a hawkish hold.
As such the bar has been set high for the RBNZ to surprise, hence why positioning flows ahead of Wednesday afternoon's meeting have pushed NZDUSD back below 62 US cents.
The mid-point of the late December to early February retreat is located at 0.6204 and could present as a near-term hurdle the Kiwi in unwilling to clear. Like the RBNZ, the Fed is also reluctant to cut rates given the run of strong macroeconomic data to start the year, including upside surprises to CPI and PPI earlier in the month.
Thursday's US session will deliver the Fed's preferred inflation gauge, core personal consumption expenditures, expected to remain near 3% (DEC. printed at 2.9%) given PCE includes similar inputs used to calculate CPI and PPI.
The constant flow of Fed speakers will also emphasise that patience is required, rate cuts likely won't commence until sometime in the second half of 2024.
As such, the US dollar should remain well supported, DXY to trade within proximity to the 14 February swing high marked just shy of 105.00.
Should last week's high near 0.6220 remain intact through this week, we suspect the Kiwi enters another period of consolidation, awaiting further evidence that will shape expectations for Fed policy and the timing of the first cut.
The 100- and 200-day moving averages currently converge around 0.6080. We expect these widely observed trend following indicators to cap the Kiwi's downside should NZD sellers re-emerge.
Looking to the day ahead, a quiet economic calendar presents CPI for Japan and from the US: durable goods orders and consumer confidence.
Japan's national CPI reading follows the Tokyo level data earlier in the month, which was softer than expected, dipping below the BoJ's 2% target for the first time since March 2022.
Having marked 9-year highs just shy of 93.50 last week, NZDJPY has traded either side of 93.00 to start this week. A soft national CPI report may drive the pair to fresh cycle highs.
Given the lack of tier 1 data over the next 24 hours, we anticipate subdued price action before the action heats up on Wednesday via the RBNZ decision and monthly CPI, across the Tasman.
Look for the New Zealand dollar to trade in the mid to high 0.61's.
Stuart Talman is Director of Sales at XE. You can contact him here.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.