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Equities up, yields up, crude up, gold up, US dollar down. It has been a huge week for commodities: oversized gains for precious and base metals. Post US CPI little has changed. Headline local upcoming event is the RBNZ decision

Currencies / analysis
Equities up, yields up, crude up, gold up, US dollar down. It has been a huge week for commodities: oversized gains for precious and base metals. Post US CPI little has changed. Headline local upcoming event is the RBNZ decision
NZD stacks

By Stuart Talman, XE currency strategist

Last week's inflation print out of the US enabled risk assets to shine as market participants bought into the narrative of the Fed cutting the target rate once, maybe twice before year-end. Rates markets now price in a full cut by September with around 50 bps of easing for the remainder of the year.

US equity markets ripped to fresh all-time highs as US treasury yields and the dollar continued to ease.

Pro-cyclical currencies outperformed amongst the G10, the New Zealand dollar claiming top spot, surging +1.90% for the week, closing near 0.6130. Having rebounded close to 5% off the 19 April swing low, the past week's close was the highest since early March.

The antipodeans have been the notable outperformers over the past four weeks, in part due to the stellar run of commodities during this span, in particular precious and base metals. For the week, silver leapt over 10%, whilst copper, regarded as a barometer for global growth prospects, advanced just shy of a double-digit week-on-week gain.

The Kiwi enjoyed broad based gains against its major peers, adding +1.86% versus JPY, climbing to fresh 9 year highs, +1.48% versus CAD, +0.99% versus EUR, +0.53% versus AUD and +0.48% versus GBP. 

So, given the pronounced directional moves of the past few weeks, has the narrative dramatically changed?

Regarding US inflation, despite core CPI logging a lower month-on-month gain for the first time in 6 months, dropping the annualised rate from 3.8% to 3.6%, the Fed is yet to gain the required confidence to commence lowering the target rate.

The Fed's preferred inflation gauge, core PCE, next released on 31 May.

Last Wednesday's core CPI result translates to a 0.24% MoM, 2.7% - 2.8% annualised core PCE. The underlying trend is circa 3%.

The Fed's mandated target: core PCE around 2%.

Therefore, one could argue that not much has changed on the inflation front……nevertheless risk assets ripped higher in response to last week's data.

However, what has changed in recent weeks is the slowdown in both the soft (surveys, eg PMIs) and hard (jobs, retail sales, etc….) data for the world's largest economy with more evidence of this last week via retail sales - missing the consensus forecast for the third time in the past four months.

Citigroup's Economic Surprise Index, which measures the variance between official economic results and forecasts has fallen to a 16-month low for US data. Should this index continue to trend lower, a new narrative emerges - one of a pronounced slowdown in US nominal growth.

Slower nominal growth is derived by slowing demand which in turn, brings prices down.

The market avoided what it most feared last week - another upside CPI surprise, and therefore believes Powell's itchy trigger finger will deliver the first cut at the 18 September FOMC meeting.

Will the dollar continue to weaken in the short term?

As mentioned, core PCE is released at the end of the month.

Between now and then we enter a two-week data vacuum - the US calendar is light in market moving releases, this week's S&P Global PMIs unlikely to influence short-term direction unless the services PMI unexpectedly plunges towards contraction territory.

Given the dearth of tier 1 data, its therefore plausible currency markets encounter a period of low volatility, perhaps persisting until the release of May's BLS jobs data, 07 May.

What to watch out for this week?

The local headline event is Wednesday's RBNZ decision - Governor Orr and his colleagues widely expected to maintain the 5.50% OCR. Focus will be on the latest offering of economic projections and any altering of the OCR track. Domestic (non-tradeables) inflation still remains too high for the RBNZ to follow the likes of the ECB and BoE in flagging an upcoming cut.

Domestic retail sales for the March quarter is released the following day.

Offshore, CPI for the UK and Canada are released whilst S&P Global delivers PMIs for the eurozone, UK and US.

Event risk also presents via Nvidia's earnings report whilst a steady flow of Fedspeak accompanies the release of FOMC minutes.

Levels to watch for the New Zealand dollar?

Last week saw the 0.6050/80 resistance zone concede as NZD/USD was propelled higher following the market's reaction to US CPI. The pair also closed above 0.6011, the mid-point of the December to April retreat.

Attention now shifts to the 61.8% Fibonacci retracement, located at 0.6172. Dating back to mid-January, 0.6140 to 0.6180 has been a common congestion zone, halting upside on countless occasions.

On the downside, the old resistance zone,  0.6050/80 forming new support, should NZD/USD hand back gains, would be an important development in confirming a prolonged run higher is evolving.

We expect further, albeit modest upside this week, NZD/USD to test upside levels in the mid 0.61's. 

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

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