By Stuart Talman, XE currency strategist
As the final session of an eventful week commenced, the market’s mood was darkening – banking concerns turning to Deutsche Bank as the cost to insure the German bank’s debt surged to four-year highs.
European equity markets were firmly lower, the Dax and Euro Stoxx 50 down close to 3% at session lows, before paring losses into the week’s close as ECB President Lagarde assured eurozone leaders that the ECB was fully equipped to support the financial system. The Dax ended the session down 1.66%.
Having failed at another attempt to find a foothold above 0.6270 resistance, the New Zealand dollar was offered throughout Friday’s local session before losses accelerated on the Deutsche Bank headlines, NZDUSD sliding back through 62 US cents.
Price action see-sawed throughout the week as banking sector news flow, rather than macroeconomic dataflow and central bank policy adjustments, continues to be the main driver.
Risk conditions improved during the New York morning on reports that US Treasury Secretary Janey Yellen would convene a meeting of the Financial Stability Oversight Council. Like the ECB, the FSOC commented that whilst some institutions are experiencing difficulties, the U.S banking system overall, remains stable and resilient.
The market continues to hold hope that US regulators will announce a blanket guarantee for all US deposits, a move that would likely fuel a sizeable risk rally.
The market’s nerves settled through US trade, delivering a turnaround for US stocks, the S&P500 closing up around half-a-percent having been own around 1% shortly after the opening bell. Logging a second week of gains, the S&P500 added 1.39% whilst the Nasdaq climbed 1.66% for the week.
US equity markets continue to search for the next directional impulse as banking sector uncertainty caps the upside, whilst the view that contagion risks have been contained, protects the downside.
Despite whipsawing price action and heightened volatility, the Kiwi’s net move for the week was a loss of ~0.90%, the weakest performer amongst the G10 cohort.
The mix of hawkish central banks - recent 50bps hikes from the ECB (the week before last) and the Swiss National Bank and the Norges Bank signalling more to come following a 25bps hike (both this past week), and relatively lower banking stress in the EU, ensured that the EUR, NOK and CHF claimed 3 of the top 4 rungs on the G10 leader board.
The Kiwi fell by -1.56% against the euro for the week and looks vulnerable to further downside. Closing last week near 0.5760, the week ahead my deliver an important test of support at 0.5700 – last year’s lows and a level that has not been breached since November 2020.
The Kiwi also logged weekly losses against the JPY (-1.56%), GBP (-1.16%) and the CAD (-0.61%), whilst gaining around a third-of-a-percent against the Australian dollar.
Having pulled back near 0.9250 earlier in the week, NZDAUD was propelled higher by dovish RBA minutes, suggesting Australia’s central bank will likely pause hiking the cash rate at an upcoming meeting. The antipodean cross ended the week near 0.9330.
In other news from Friday, flash readings for S&P Global PMIs continued to show resilient economic performance, notably in the services sectors for the UK, eurozone and US economies, all printing firmly in expansionary territory (above 50.0). The US and eurozone services PMIs easily beat consensus forecasts.
It’s a different story for the manufacturing sectors of these major economies, continuing the sub-50.0 trend, recording contractionary activity.
The PMI data had little impact on price action, conforming that banking sector news flow continues to be the critical short-term driver of sentiment and direction.
Looking to the week ahead, on paper, it appears to be a relatively quiet week for market moving data releases. Inflation data for the eurozone and Australia and US GDP are the three tier 1 macroeconomic data points of note.
It’s a busy week of central bank speakers, a multitude of Fed, ECB, BoE, BoJ and RBA officials sharing their latest thoughts on monetary policy, and perhaps more importantly, financial stability issues.
These speeches and the latest developments regarding the regional US banks, likely to dictate the market’s weekly direction.
Predicting the Kiwi’s path for the week ahead via a binary outcome – an announcement that all US banking deposits are insured, NZDUSD rips back up through 63 US cents…..no blanket deposit guarantee, a neutral to downside bias remains.
We favour the latter.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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