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USD softens, yields fall on ISM Manufacturing/Mich. consumer sentiment misses. Eurozone inflation declines less than expected, core remains above 3%. A rare bright spot: China's non-manufacturing PMI beats expectations

Currencies / analysis
USD softens, yields fall on ISM Manufacturing/Mich. consumer sentiment misses. Eurozone inflation declines less than expected, core remains above 3%. A rare bright spot: China's non-manufacturing PMI beats expectations
Kiwi falling

By Stuart Talman, XE currency strategist

Soft US economic data weighed on treasury yields and the dollar through the final session of the week whilst US equity markets continued to rip higher on AI frenzy and hopes the Fed will commence lowering borrowing costs in the months ahead.

Both the S&P500 and the Nasdaq logged fresh all-time highs, the latter ripping through it November 2021 high.

Following Wednesday's RBNZ induced sell-off, the New Zealand dollar continued to trade with a downside bias through the final two days of the week, although selling momentum notably slowed.

Commencing the final local session of the week in the high 0.6000’s, the Kiwi appeared unwilling to venture back through 61 US cents, easing to fresh week-on-week lows in the 0.6070's during morning trade, suggesting an imminent re-test of major support around 0.6050.

Choppy, directionless and uneventful price action was the state of play through the Asian afternoon and European trade despite Friday's busy economic calendar delivering PMIs for China and the latest metrics on eurozone CPI.

The Kiwi received a modest uplift following the release China's official PMIs, manufacturing printing in line at 49.1, but lower from the prior months reading of 49.2, extending the run of contractionary readings into a fifth month. The non-manufacturing PMI which reports economic activity across both the services and construction sectors, surprised to the upside, the 51.4 reading (vs 50.8, expected) the highest in 6 months. The Lunar new year holidays were a contributing factor, driving a spike in travel and tourism activity. 

Whilst there were some clear bright spots in the PMI data, concentrated mostly in the services sector, the reality is the world's second largest economy continues to sputter due to its ailing property sector, deteriorating consumer sentiment and Chinese authorities’ underwhelming policy responses.

Next week the annual meetings of the National Committee of the Chinese People’s Political Consultative Conference and the National People’s Congress will take place. Named the Two Sessions, these meetings set out the management of China's economy in the year ahead, including major policy announcements, reforms and government appointments.

Whilst the expected and actual path for Fed policy remains the key factor for currency markets, China proxies such as the New Zealand and Australian dollars are also significantly impacted by the performance of the Chinese economy and Beijing's policies.

Poor sentiment regarding the growth outlook for China continues to weigh on the antipodeans.

Shifting to the latest reading on eurozone inflation, annualised headline CPI fell from 2.8% to 2.6% (vs 2.5%, expected) whilst core fell from 3.3% to 3.1% (vs 2.9%, expected). Given the fall in inflation was smaller than expected, the ECB will likely maintain its messaging at this week’s meeting: policy rates will remain at their peaks in the coming months, with cuts commencing when the incoming data warrants.

Having tested levels near 10 month highs the week prior, NZDEUR rejected a critical 0.5720/50 resistance zone, falling -1.57% for the week. Pulling back to the convergence of the 100- and 200-day moving averages and, last week's lows a few pips through 0.5610 also touched trendline support.

Price action had formed an ascending triangle technical pattern, suggesting a topside break and fresh upswing through 0.5750, however last week's developments, specifically the RBNZ failing to meet hawkish expectations invalidated the bullish pattern's predictive capabilities.

Given the ECB is likely to commence its easing cycle before the RBNZ, anticipate another test of 0.5720/50 resistance heading into the northern hemisphere summer.

Jumping across the North Atlantic, currency markets sprung to life to in US trade following the release of the ISM Manufacturing PMI and the latest reading of Michigan consumer sentiment.

Manufacturing activity in the US fell from 49.1 to 47.8 (vs 49.5, expected), dashing hopes for a lift back above 50.0. The PMI last printed in expansionary territory in October 2022. It was a surprising result, particularly given the size of the miss, but amidst the strong run of activity data to start the year, is regarded as a blip, rather than indicative of a suddenly cooling US economy.

The New Zealand dollar jumped from below 0.6080 through 0.6110 on the back of the soft PMI and the University of Michigan's consumer sentiment index also missing expectations.

Gains were modestly pared through the New York afternoon, NZD/USD ending the week a pip or so below 61 US cents for a week-on-week decline of -1.39%. The Kiwi was a noted underperformer, claiming the bottom position on the G10 leaderboard by a notable distance. The Aussie was the next worst performer, shedding just over half-a-percent.

A tough week for the Kiwi, logging widespread losses against AUD (-0.84%), CAD (-1.00%), GBP (-1.25%), EUR (-1.57%) and JPY (-1.61%).

What are the potential market moving events for the week ahead?

Friday's monthly jobs report is the week's headliner, the US economy projected to have added 188K new jobs through February. Non-farm payrolls exceeded the 300K mark in the two months prior. A similar result would cause both the Fed and the market to question whether the projected 3 quarter point cuts are required given the labour market shows little signs of cooling. The unemployment rate is projected to remain steady at 3.7%.

Other major events out of the US include the ISM Services PMI and Fed Chair Powell's two-day testimony in front of the house and the senate. Fed officials have mostly been unified in their messaging - patience is required, the time is still not right to commence easing monetary conditions.

The ECB interest rate decision, Thursday, is the biggest event outside of the US. An on-hold decision is universally expected as is kick back from ECB President Lagarde, reiterating it's premature to even consider the timing of the first cut.

Other events to note include CPI for Tokyo, eurozone GDP and retail sales, AUS GDP and trade balance data. Wage data out of Japan will also be keenly observed given implications for BoJ policy and expectations for an end to yield curve control and negative interest rates.

It’s a quiet week for domestic data, absent tier 1 releases.

Last week's underperformance has the Kiwi starting the new week trading in the lower half of the prevailing 7-week range. Following Wednesday's steep sell-off, the final two days of the week produced tight ranges, NZD/USD unwilling to rebound through 61 US cents with conviction.

Price action suggests NZD sellers retain the upper hand which may lead to a re-test of critical support around 0.6050.

The obvious catalyst for NZD/USD to break out below the current range is a strong US employment report. Expect the Kiwi to trade sub-0.60 late in the week if non-farm payrolls again surprises higher. 

Stuart Talman is Director of Sales at XE. You can contact him here

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