By Stuart Talman, XE currency strategist
Markets continue to trade in prevailing ranges ahead of a speech from Fed Chair Powell this morning and Friday’s all-important US jobs report.
Following more optimistic headlines regarding China’s covid situation and a potential 2023 re-opening, the New Zealand dollar was in recovery mode through Tuesday, rebounding from near 0.6160 to 0.6250.
Wednesday has consolidated these gains in a higher range, price action contained between 0.6190 and 0.6250.
Having peaked just shy of 63 US cents on 24 November, the Kiwi and other assets have entered a holding pattern, searching for the next drivers to resume the year-end rally that commenced in earnest, mid-October.
More positive developments out of China, softer-leaning US data, the Fed easing back to a 50bps hike on 14 December and market pricing for the Fed Funds terminal rate remaining near 5% - required to propel risk-assets higher as we close out a remarkable year.
Wednesday’s economic calendar was full, the major data point being the preliminary reading of eurozone inflation for November.
Last month, headline inflation in the EU reached a record high 10.6%. This month has delivered a desired pullback, falling energy prices delivering a downside surprise – headline inflation printing at 10% (versus 10.4%, expected).
Core inflation remained steady at 5%.
Whilst its an encouraging result, it’s too premature to declare that eurozone inflation has peaked, the risk being an intensifying of the energy crisis during the European winter.
However, the ECB will be pleased with both the region-wide and country-level inflation reading this week and may opt to slow the pace of hikes with a 50bps hike on 15 December following back-to-back 75bps hikes.
The euro has rebounded over the past couple of months off the back of an lower energy prices and hawkish ECB-speak, EURUSD climbing from below 0.96 to form a double top near 1.0500 over the past fortnight.
The leg-up has stalled at the 200 day moving average.
The Kiwi continues to grind higher against the euro, logging fresh 2½ month highs above 0.60.
Price action had been oscillating around 0.5996 – the 50% Fibonacci retracement of the August-October down-leg. The 200 day moving average also located near 0.60.
Having ascended through this key technical resistance zone with impetus, logging early morning highs just above 0.6040, NZDEUR looks well positioned for further upside through December and into the new year.
Softer than expected inflation was also the storyline across the Tasman, the Australian Bureau of Statistics new monthly CPI indicator reporting a moderation in the pace of annual inflation from 7.3% to 6.9%.
The result vindicating the RBA’s decision in September to commence slowing the tightening cycle.
The rate sensitive NZDAUD climbed back into the high 0.92’s following the release, seemingly building momentum to mount another challenge to break-out above 0.93.
Wednesday’s high logged a few pips above 0.9290.
In the US, ADP employment change and JOLTS jobs opening data was released, the former delivering a downside miss (127K vs 200K) whilst JOLTS were in-line.
Should Friday’s non-farm payroll follow ADP’s lead with a moderate downside miss, US equities and other risk assets are likely to respond favourably.
Heading into the New York afternoon, the three major US equity indices are logging modest declines. We’ll likely see more lively price action in the back-end of the session as both Fed Chair Powell’s speech and month-end flows drive direction.
Compared to yesterday’s data flow, Thursday’s economic calendar is light – no market moving events during the local session.
German retail sales and personal consumption expenditure (PCE) out of the US the noted offshore events.
Powell’s speech will likely dictate any key directional moves over the next 24 hours – he’s likely to maintain his hawkish tone given the US economy has not cooled enough to meaningfully bring down inflation.
Falling bond yields and rising equity markets also not the Fed’s desired dynamic. Powell will not want to place too much emphasis on slowing the tightening cycle as this will further embolden the equity market bulls.
Our near term resistance and support levels for NZDUSD are 0.6250 and 0.6160.
Having tested the lower bound of this range to start the week, risk sentiment has improved as the week has progressed.
If US equities respond favourably to Powell’s speech, or maintain current levels, the Kiwi looks primed to breakout above 0.6250 resistance, delivering further consolidation above the 200 day moving average.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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