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A perfect storm for the dollar; DXY on track to take out 2023 high. China activity data: GDP beats, retail sales, industrial production misses.PBoC appears to be conceding defeat to USD given weak CNY fixing

Currencies / analysis
A perfect storm for the dollar; DXY on track to take out 2023 high. China activity data: GDP beats, retail sales, industrial production misses.PBoC appears to be conceding defeat to USD given weak CNY fixing

By Stuart Talman, XE currency strategist

The dollar's march higher continues, the mix of Middle East angst, US macroeconomic data upside surprises and rising expectations of central bank policy divergence fuelling the ascent resulting in the dollar index (DXY) climbing close to 4% over the past 26 trading days.

A further ~1% advance will lift the DXY through its 2023 high, marked just below 107.35.

The euro, pound, loonie, Aussie, Kiwi have all fallen to 5-month lows whilst the Japanese yen continues to weaken, logging fresh 34 year lows, USD/JPY approaching the 155.00 mark, raising expectations the Ministry of Finance will intervene.

Although given the surge in US bound yields, the 10-year note now probing 4.70%, MoF intervention may prove ineffectual should the run higher be prolonged.

From its pre-US CPI high a few pips north of 0.6080 on 10 April, the New Zealand dollar has fallen over 3.5% in just 5 trading days, slipping below 59 US cents for thew first time since mid-November.

The 78.6% Fibonacci retracement of the October to December rally, located at 0.5901 has now been breached, an outcome the raises the probability of a re-test of the 2023 low, a few pips above 0.5770.

The market currently prices in circa 40 bps of Fed easing for 2024, down from over 150 bps earlier in the year, implying the Fed will deliver one cut, perhaps a second, before the end of the year.

Recent messaging from Fed officials has been clear: they are in no rush to commence monetary easing; the worst thing to do would be to prematurely cut; the economy is performing solidly.

Unlike other developed nations, inflation readings in the US have surprised higher through the first three months of 2024. Should this trend prolong whilst the underlying macro data flow continues to report a strong labour market and a willing consumer, both the Fed and the market will strip out all expected rate cuts for 2024.

Should this scenario play out as we head into mid-year, the New Zealand dollar and other major currencies will continue to track lower as the dollar's supremacy is sustained.

Heading into 2024, the base case called for the Fed to commence cutting in March or May, being the first of the major central banks to kick-off a synchronised global monetary easing cycle.

Now, the Fed is projected to deliver its first 2024 cut at the 18 September FOMC meeting, Fed funds futures currently assigning a ~70% implied probability to this outcome.

The Swiss National bank has already cut, whilst the European Central Bank and Bank of Canada are increasingly expected to commence their respective easing cycles in June.

A mixed UK labour market report, released Tuesday, reported negative jobs growth for a second month as the unemployment rate stepped up from 3.9% to 4.2% (vs 4.0%, expected) - outcomes, in isolation, that would prompt the Bank of England to commence cutting.

However, wages growth is still running too hot for comfort, therefore positions a BoE cut as an August proposition.

Three days of selling has pushed NZD/GBP to 7-month lows, Tuesday's intraday lows marked a few pips below 0.4720. Further downside likely whilst the risk environment remains shaky.

First quarter CPI for the domestic economy is released at 1045 this morning, consensus forecasts projecting quarter-on-quarter inflation to tick higher from 0.5% to 0.7%, pushing the annualised rate down from 4.7% to 4.1%.

An upside surprise, particularly to domestic non-tradeables (services) would add weight to the case for the RBNZ to refrain from cutting the OCR in 2024. Conversely, a CPI miss would increase expectations for a cut, sometime in late 3Q, early 4Q, in turn extending the Kiwi's downside run.

The path of least resistance for NZD/USD remains lower.

The mix of uninspiring China activity data and a weaker Chinese yuan also creates notable headwinds for the New Zealand dollar.

Whilst first quarter GDP did beat expectations by a notable margin, printing at 5.3% (vs 4.6%, expected), industrial production and retail sales data was poor whilst new home prices fell at their fastest pace in eight years and property investment fell almost 17% year-on-year.

Simply, Chinese households are reluctant to spend due to deteriorating levels of confidence as the property sector continues to cause angst.

Layer in the People's Bank of China permitting a weaker daily reference rate for the yuan, which indicates the PBoC is willing to succumb to the mighty dollar, it's yet another influence that pushes NZD/USD lower.

The New Zealand and Australian dollars are the two most closely correlated currencies to the yuan. Should the PBoC permit USD/CNY to ascend through 7.25 (currently in the high 7.23's), the Kiwi's and Aussie's respective downswings will continue.

Looking to the day ahead, the headline domestic event is the aforementioned 1Q CPI release.

Offshore, UK CPI and trade data for Japan will be the focus.

A wave of central bank speakers from the BoE, ECB and Fed could also affect near-term direction.  

The dollar is an unstoppable force at present, NZD/USD likely further to run, falling into the mid 0.58's.


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

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Thanks Stuart. If the ECB cuts soon, where to then for the USD ....