By Stuart Talman, XE currency strategist
The notable overnight move to start the new week has been a surge in US bond yields, in turn supporting a stronger US dollar. Only the Australian dollar (up around a third-of-a-percent) and the CAD (marginally higher) log intraday gains for Monday.
Commencing the week near 0.6170, the New Zealand dollar has ranged between the 0.6160’s and 0.6200. An attempt to break up through 62 US cents failed as the yield on US treasuries strengthened through the New York morning, propelled higher by a few factors.
The first being the release of the more widely followed (relative to the S&P Global PMIs) ISM Manufacturing PMI. Whilst the measure of manufacturing activity for the US economy did exceed the consensus forecast (47.7 vs 46.6), the sub-50 result brings the streak to 6 months of contractionary readings – the longest since the GFC.
The US manufacturing sector is clearly in recession.
Within the broader PMI, the employment and prices paid sub-gauges have reported noted upside surprises – an undesirable result given the inflation fight continues.
Rates markets ripped higher following the PMI release, the benchmark US 10-year yield climbing just shy of an important resistance zone above 3.60%. A decisive break above here, the likely catalyst being the Fed delivering a hawkish 25bps hike on Thursday, likely delivers a negative shock for US equities and other risk sensitive asserts, including the New Zealand and Australian dollars.
Other factors that are supporting higher US yields: news that JP Morgan acquired First Republic Bank and frantic debt issuance from US corporates, Bloomberg reports:
As Wall Street gears up for the Fed’s 10th consecutive rate hike since March of last year, several borrowers are anticipated to pile in after exiting their earnings blackouts, with Meta Platforms Inc. said to be looking to raise $8.5 billion…… These big offerings usually represent a double-whammy for Treasuries, which tend to cheapen amid competition from new debt and as underwriters sell government notes to rate-lock the issue for corporate buyers.
Falling bond prices equates to rising yields, driving capital flows towards the US dollar.
The dollar index (DXY) tests critical resistance at 102.20 having failed to break though here a couple of weeks back. We may see an important topside breakout this week should the ECB opt for a 25bps hike over 50bps. As the EUR has a ~58% weighting in the index, the DXY is most sensitive to movements in the shared currency.
At just under 14%, the second largest weighing in the DXY belongs to the Japanese yen which has continued to weaken following Friday’s dovish BoJ monetary policy meeting.
Logging its largest gains against JPY, climbing over half-a-percent, NZDJPY moves closer to testing key resistance near 85.00, a level that has capped price action for the past 5 months.
Kiwi importers trading with your Japanese suppliers – you are being presented with attractive levels.
The Kiwi is also firmer against the pound and euro attempting to base around 14 month lows versus GBP and 2 ½ year lows against the EUR.
Given the ECB is nearing the end of its tightening cycle (the market prices in a further ~3 x 25bps hikes), we may see a step-down to quarter point hikes as Lagarde and her GC colleagues assesses the lag effects of ~400bps of tightening. If the ECB were to flag an upcoming pause, the euro’s period of outperformance may be coming to an end.
This evening’s eurozone inflation report and ECB bank lending survey are two critical data points to influence Thursday’s interest rate decision.
The major event for today – the RBA’s interest rate decision.
Market pricing calls for a near 100% probability the cash rate is held steady at 3.60%.
Whilst the RBA paused at its April meeting following 10 consecutive hikes, it maintains a tightening bias. The Aussie labour market is historically tight, house prices have not only based, but firmed over the past quarter and population growth is back on the rise – all factors that feed into sustaining inflation levels that remain well above the RBA’s 2-3 percent targeted range.
There is a chance, albeit a slim one, the RBA hikes today.
Having u-turned near 0.9350, NZDAUD would plunge through 0.9250 should the RBA surprise…..or keep rates on hold but flag that additional 2023 hikes are still being considered should the macroeconomic dataflow warrant.
It’s a quiet night for US data releases ahead of a mammoth Wednesday session that serves up ADP employment change, the ISM Services PMI and the week’s headline event – the FOMC meeting.
Having failed near 62 US cents, our attention turns to a key downside support zone located between 0.6100/20. If NZDUSD price action moves below here, a second test of the year-to-date low at 0.6084 is inevitable with a new swing lower to evolve.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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