By Stuart Talman, XE currency strategist
Following Thursday's weaker than expected US GDP report which was accompanied by a stronger-than-expected quarterly core PCE print (3.7% vs 3.4%, expected), the market was bracing for a hot PCE number during Friday's session when the monthly figures were released.
However, month-on-month core personal consumption expenditure met the consensus projection at 0.3%, meaning the prior day's hot quarterly number was attributed to upward revisions for both the January and February data.
US equity markets celebrated the result, the Nasdaq leading the charge higher, gaining over 2%, whilst the S&P500 advanced over 1%. The mix of in-line monthly PCE data and impressive earnings results catapulted the two equity indices to their largest week-on-week gain this year, the S&P500 up +2.67%, the Nasdaq leaping +4.23%.
In immediate response to the PCE data, US treasury yields spiked higher, acknowledging that at 0.3%, MoM core PCE remains too high for comfort, forcing the Fed to maintain a peak target rate for the next few meetings. Increasingly, its looking unlikely Jerome Powell and his FOMC colleagues will commence cutting in 2024.
Following Thursday's sell-off in response to the quarterly PCE release, the New Zealand dollar recouped all its losses through local trade, rebounding from 0.5920 to mark Friday's highs around 0.5970. However, just as it did the prior day, NZD/USD was unwilling to extend beyond, falling circa 40 pips through offshore trade to end the week in the 0.5930's.
Gaining +0.83% for the week, the Kiwi claimed third position on the G10 leaderboard , outpaced by the British pound: +0.99% and the Australian dollar - the week's standout performer, climbing +1.81%. The Aussie's outperformance was attributed to PMI misses in the US, Wednesday's domestic CPI beat and continued strength in commodity prices - Bloomberg's commodity index has risen in 7 of the past 9 weeks.
Whilst it's too premature to declare an end to the dollar's dominance, upside momentum has stalled over the past week or so. The dollar index (DXY) surged over 4% from early March as the market stripped out expectations of Fed monetary easing through 2024 given the resiliency of the US economy and data through the first quarter signalling inflation has not only bottomed out, but risks heading higher.
The dollar could resume its advance this week should Fed Chair Powell adopt a more hawkish tone at this week's FOMC meeting, delivering a message that implies rate cuts may not commence until late in the year, possibly even delayed to 2025.
US jobs numbers are released at the back end of the week, expected to show the world's largest economy added +243K new jobs (down from +303K) whilst the unemployment rate remained steady at 3.8%. Another blowout non-farm payrolls number in the high 200's or above 300K could force some FOMC members to question whether a 5.25% - 5.50% Fed funds target rate is sufficiently restrictive to return inflation to 2%.
The potential mix of a hawkish Fed and hot jobs report would push US treasury yields higher, igniting a fresh leg higher for the dollar. In this scenario NZD/USD fails to hold above 59 US cents, setting up a re-test of the 19 April swing low near 0.5850.
In other major news from Friday, softer-than-expected Tokyo CPI (1.8% vs 2.6%, expected) and dovish Bank of Japan meeting induced heavy JPY selling, USD/JPY climbing over one-and-three-quarters percent, leaping from 155.00 to a fresh 30 year high through 158.40.
As widely expected, BoJ Governor Ueda delivered an on-hold decision whilst also maintaining the same level of bond purchases. In the lead up to the meeting speculation had grown regarding a potential quantitative tightening announcement given media report flagged this as a potential outcome.
Given pronounced JPY weakness of the past 6 weeks, the market expected Ueda to defend the currency, but ultimately failed to deliver any hawkish rhetoric, nor any forward guidance that implied tighter monetary conditions ahead.
This was the greenlight for JPY sellers.
Climbing for a fifth consecutive day, NZD/JPY logged a weekly gain of +3.25%, ripping through the previous nine year high near 93.40 to log highs in the low 94.00's.
Many (including this author) expected Japan's Ministry of Finance to intervene once USD/JPY advanced decisively through 155.00 given comments from MoF officials over the past fortnight.
Given it’s a national holiday in Japan today, the MoF won't act, potentially holding off to observe the market's reaction to the FOMC decision/statement/press conference in the early hours of Thursday morning.
The line in the sand for USD/JPY is now likely 160.00.
Looking to the week ahead, in addition to the FOMC meeting and US jobs report, other market moving events present via retail sales across the Tasman, official PMIs for China, eurozone GDP and inflation data and ISM PMIs out of the US.
The headline local event is first quarter jobs numbers - the unemployment rate expected to tick higher from 4.0% to 4.2% with jobs growth cooling from 0.4% to 0.3%. Wage inflation is expected to ease from 1.0% to 0.8%, a level that is still uncomfortable for the RBNZ.
The US treasury's quarterly refunding announcement (QRA) will also be closely watched. Analysts are not expecting a change to projected borrowing needs for this quarter but are expecting a notable increase through the second half of the year given the outlook for fiscal spending remains bullish.
US earnings season continues: Amazon and Apple the highlights.
It may prove a pivotal week in determining the dollar's next key directional move.
Stuart Talman is Director of Sales at XE. You can contact him here.
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