Kiwi downside pressure remains as recent data signals sluggish growth. US dollar downturn expected once Fed commences easing, but may not play out

By Stuart Talman, XE currency strategist

The new week has commenced in typically quiet fashion given the absence of market moving catalysts and news flow through Monday's sessions. Global equity markets, major currencies and rates markets have traded in relatively tight ranges following on from last week's flood of central bank meetings and numerous tier 1 data releases for various developed economies.

The narrative from last week was rising positive risk sentiment as the Fed and other major central banks signalled that rate cuts are likely to commence in the coming months as inflation continues to ease towards targeted levels. The Swiss National Bank delivered the major shock, cutting its main policy rate by 25 bps to 1.50%. An on-hold decision had been widely expected.

Despite the three major US equity markets ascending to fresh record highs, the US dollar outperformed risk sensitive currencies, the New Zealand dollar being a notable underperformer, slipping below 60 US cents for the first time since November.

The dollar outperformance can be attributed to US economic exceptionalism in addition to the view that major central banks, such as the ECB and BoE will initiate their respective tightening cycles before the Fed and may be prompted to deliver more rate cuts given less favourable growth outlooks. 

The US economy grew at an annualised rate of 3.20% in 4Q, the eurozone economy at 0.1% and the UK's estimated at 0.1%, its weakest annual change in real GDP since the financial crisis in 2009.

Simply, the US economy is humming along, whilst others are sputtering.

Including the domestic economy.
 

Last week's GDP data reported the December quarter contracted at -0.1%, following on from 3Q's -0.3% contraction, bringing the annualised growth rate to -0.3%.

Despite the softening growth backdrop, domestic inflation remains uncomfortably high, creating a stagflation headache for the RBNZ - it's premature to commence an easing cycle. 

The Kiwi looks set to continue to underperform the dollar and at most track sideways against other major peers whilst the macroeconomic data flow underwhelms.

Commencing the new week in the 0.5980's, NZD/USD price action has been contained in a circa 25 pip range, unwilling to venture too far away from 60 US cents.

The 61.8% Fibonacci retracement of the October to December rally is located at 0.6001. A decisive break below opens a path to test the 78.6% Fib at 0.5901. A key support zone is located between 0.5860 and 0.5900. Below here, the 2023 low a few pips above 0.5770 presents.

Don't rule out a potential test of 0.5770 over the next few months.

The base case amongst the analyst community is the dollar downturn will commence when the Fed delivers its first rate cut, widely expected at the 12 June meeting, Fed fund futures assigning a circa 70% implied probability.

However, following on from hot CPI prints in January and February, a similar outcome for March's consumer price data (released 10 April) would likely cause Jerome Powell and his FOMC colleagues to re-think the path for the target rate, delaying cuts to later in the year, possibly after the November election date.

This is the path by which the New Zealand dollar could fall another 3% - 4% from current levels, breaching the 2023 low.

Whilst we're not betting the house on this outcome, we're certainly not discounting it.

Looking to the day ahead, a light economic calendar is unlikely to deliver any market moving events.

The Kiwi is likely to remain anchored around 60 US cents.

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