By Stuart Talman, XE currency strategist
The release of China's government work report and a downside miss in the ISM Services PMI are the two major storylines from Tuesday's sessions, the latter driving US treasury yields lower whilst reversing the dollar's gains.
Risk sentiment has taken a hit, the S&P 500 and Nasdaq pullback for a second day from Friday's all-time highs as megacap tech stocks lead the broader market lower. The Nasdaq fell close to 2%.
The New Zealand dollar continues to deliver choppy price action, ranging between the high 0.6000's and low 0.6100's for a fourth day, downside once again capped in the 0.6050/80 support zone that has been challenged via four prominent swing lows from late January.
Marking Tuesday's intraday lows a pip or so above 0.6070, NZD/USD looked poised for a downside breakout during the first half of European trade, but ultimately reversed course, rebounding circa 40 pips through the London afternoon and into the New York handover.
The catalyst for the US dollar's reversal was a softer-than-expected ISM Services PMI. Economic activity in the world's largest economy expanded for a 14th consecutive month, the headline reading printing at 52.6, falling from 53.4 (four month high) in January and below the forecasted consensus of 53.0.
Whilst it was by no means a poor result, with the business activity/production and new orders sub-gauges rising, the downside miss follows Friday's ISM Manufacturing below-consensus result.
Heightened sensitivity to the macroeconomic data flow for financial assets has been a major theme to star 2024 - each reading on the US economy shaping expectations for Fed policy. Mostly strong data flow has compelled the market to dial back the timing and speed of Fed easing - around 3 quarter points cuts projected, starting sometime around mid-year.
In yesterday's update we mapped out a path by which the Fed may not hike at all given the mix of an election year and a US economy that sustains its resiliency.
Following the release of the ISM Services PMI, the yield on the benchmark 10-year note ripped below 4.20% to bottom near 4.11%, in turn weighing on the dollar.
Spiking from the 0.6080's to touch 0.6110, the New Zealand dollar has failed to capitalise on the ISM miss, paring gains to enter the New York afternoon back below 61 US cents.
Attempting to the predict the Kiwi's next key directional move solely via considering the technicals, the past four trading day's price action suggests NZD buyers are unwilling to commit to re-establishing a foothold above 0.61, signalling a potential re-test and beak below major support around 0.6050.
Fundamentally, the obvious near-term catalyst for NZD/USD to extend down to 3½ month lows is a non-farm payrolls upside beat on Friday, reporting somewhere in the region of 220K - 300K new jobs created in February.
Conversely, sub-200K jobs growth likely induces dollar selling, propelling NZD/USD decisively into the mid to high 0.61's.
Turning our attention to China's Two Sessions meetings, Beijing's no. 2 official, Premier Li Qiang has delivered the government's work report, outlining growth, employment, inflation and spending targets for the world's second largest economy.
As expected, a 5% annualised growth rate has been maintained, which may prove a challenge to reach given China's economy encounters many challenges and the budget deficit for the year ahead has been set at 3% of GDP, down from last year's actual of 3.8%.
China's equity markets were clearly not onboard with the announced targets, the Hang Seng falling close to 3%, logging its second largest intraday decline for the year.
There is a lack of confidence in the Chinese authorities’ ability to restore confidence, given the unwillingness to deliver direct and compelling fiscal stimulus. Bloomberg comments:
While Li told delegates support was needed on “all fronts,” his report didn’t reflect that: He kept the fiscal deficit flat, avoided major moves to boost consumption and gave few specifics on solving the real estate crisis. The Asian nation’s slide into its longest streak of falling prices since the 1990s wasn’t directly addressed.
A target without a plan.
China's uncertain growth outlook continues to generate headwinds for the New Zealand and Australian dollars.
To the day ahead, the major event is the first day of Fed Chair Powell's semi-annual congressional testimony. Expectations are for Powell to once again stress that patience is required, the time is still not right to commence cutting rates.
Other potential market movers include Aussie GDP, eurozone retail sales, and ADP employment change in the US. The Bank of Canada meets, widely expected to maintain a 5.00% policy rate, but perhaps signalling the time is nearing to commence cutting.
Downside risks prevail for the New Zealand dollar.
It would surprise if Powell delivered what could be interpreted as dovish comments when he testifies to the House Financial Services Committee. We expect tight range trading to continue ahead of Friday's official jobs data, the Kiwi struggles to trade much beyond 61 US cents.
Stuart Talman is Director of Sales at XE. You can contact him here.
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