By Stuart Talman, XE currency strategist
A wave of negative risk sentiment swelled through Friday's sessions, risk sensitive assets extending further to the downside as geopolitical angst and hawkish Fedspeak fuelled deleveraging flows that were most pronounced in mega-cap tech stocks.
Whilst intraday net changes for the major currencies were mostly contained in a +/- 0.50% band, the Nasdaq was pummelled over 2%, its largest daily decline since late January. Shedding -5.52% for the week, the tech sensitive index logged its worst weekly performance since October 2022, its losing streak extending into a sixth consecutive day. Likewise, the S&P500 fell through day six, its longest losing streak since January 2022.
Rising US treasury yields has called into question the sustainability of loft equity market valuations, particularly within the frothiest cohort of the market - bigcap tech. Should these market darlings fall short of 1Q earnings expectations in addition to providing underwhelming forward guidance, expect a more protracted equity market correction.
The risk sensitive New Zealand and Australian dollars have failed to capitalise on the first quarter equity market rally given US exceptionalism (strong macro data flow) and the dialling back of Fed rate cut expectations. The antipodeans could come under renewed selling pressure should the pullback in US stocks become disorderly.
The week ahead may prove pivotal for the near-term direction for US equities, a huge week of earnings sees Tesla, Meta, Microsoft and Alphabet (Google) reporting.
Heading into the final sessions of the week, the New Zealand dollar looked to be re-establishing a foothold above 59 US cents having initiated a mid-week rebound from around 0.5860 following the domestic CPI release which again reported undesirable sticky domestic (aka non-tradeables or services) inflation.
However, the Kiwi was offered throughout the early stages of local trade, slipping from overnight highs a few pips through 0.5930 to the low 0.59's as midday neared. Following news that Israel forces had retaliated in response to Iran's retaliation, NZD/USD and other risk sensitive assets lurched to the downside, NZD/USD falling some ~50 pips to mark a fresh five month low a couple of pips above 0.5950.
As the newsflow confirmed it was a limited strike with no intention to escalate, losses were pared and by the European afternoon, the Kiwi had rebounded back through 0.59.
Considering the notable losses for the Nasdaq, the Kiwi held up admirably in US trade, shedding ~20 pips to end the week in the 0.5880's.
Our key, near-term downside support level to monitor for the start of this week is 0.5850. Should this fail to hold, expect a re-test of the 2023 low, located a few pips above 0.5770.
In other news from Friday, UK retail sales, the sole tier 1 data release, missed expectations - flat for the month of March. Following the data, Bank of England deputy governor Dave Ramsden delivered a speech, commenting that he has become more confident that domestic inflation pressures are easing such that the balance of risk for UK CPI favours the downside.
Ramsden's comments are in stark contrast to Jerome Powell and his FOMC colleagues who this week, made it clear the Fed does not have the confidence to commence cutting - rate cuts will be delayed.
In the case of NY Fed Governor, John Williams, the influential FOMC voter confirmed that rate hikes are back in the Fed's periphery should the data flow warrant tighter policy settings.
The weak data and somewhat dovish comments were enough to send the pound to the bottom of the G10 leaderboard, GBP/USD falling over half-a-percent.
The pound was the sole major currency the Kiwi outperformed through Friday, NZD/GBP adding over a quarter-of-a-percent, to end the week near 0.4760. The pair has found support around 0.4720 in recent weeks, hoping to arrest a slide that has NZD/GNP down over 4%, year-to-date.
The Bank of England initiating its monetary easing cycle ahead of the RBNZ is one factor required to induce a meaningful leg higher for NZD/GBP. Both economies appear to on a similar trajectory - a challenging period ahead as growth continues to stagnate under the weight of higher borrowing costs.
So, what to look out for in the week ahead……
A big week of earnings as flagged earlier in the update. It could get real turbulent in the equity markets.
The global economic calendar is relatively quiet, presenting PMIs for the UK, EU, US and others, US GDP, Tokyo CPI and the Fed's preferred inflation gauge, core personal consumption expenditures.
Regionally, the headline event is first quarter CPI across the Tasman, headline inflation in Australia expected to cool from 4.1% to 3.4% on an annualised basis.
Similar to the domestic economy, services inflation remains uncomfortably high across the ditch, preventing both the RBNZ and RBA to lower borrowing costs. Therefore, rate cuts on either side of the Tasman are not expected to commence until later in the year, or perhaps in 2025 should non-tradeables inflation remain elevated as the respective labour markets remain tight.
Geopolitical developments and the price of crude also have the potential to influence near-term direction.
Fedspeak is on hold - the blackout period engaged ahead of the 01 May FOMC meeting.
At the start of last week, we projected: sub-0.59 levels to be tested as risk sentiment remains fragile.
More of the same this week expected until some catalyst emerges to halt the dollar's dominance…..the NZD/USD set-up portends further downside.
Stuart Talman is Director of Sales at XE. You can contact him here.
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