By Stuart Talman, XE currency strategist
Cautious optimism regarding a US debt ceiling deal has brightened the market’s mood through Wednesday as President Biden announced that he will curtail his itinerary, heading back to the US over the weekend instead of travelling on to Australia and Papua New Guinea following the G7 meeting in Hiroshima.
Following tight range trading, the three major US equity indices are firmly in the green, the Nasdaq extending to fresh 9-month highs, the S&P500 approaches major resistance at 4200 whilst the Dow rebounds following a circa 3% decline through the first half of the month.
It’s the most pronounced upside move for all three indices over the past couple of weeks.
The New Zealand dollar is one of the strongest performers amongst the G10 cohort, adding over half-a-percent, logging a higher high for the third consecutive day. Following a pronounced sell-off through the final two days of last week, the Kiwi has based in the 0.6180’s, recovering around a half of the decline.
This week, we’ve been monitoring a resistance zone at 0.6250/80 given the 50% Fibonacci retracement (26 APR. to 11 MAY. upswing) is located at 0.6248 whilst the 100-day moving average resides in the 0.6270’s.
Should price action clear both technical hurdles this week, NZDUSD likely extends back up into the upper bound of the prevailing 3-month range to mount a re-test of last week’s high at 0.6385.
Marking an overnight high a few pips through 0.6270, NZDUSD price action came within a whisker of touching the widely monitored 100-day MA.
The obvious catalyst for risk assets to extend higher in the short-term – news that congressional leaders have agreed on a deal to raise the debt ceiling.
Despite House Speaker Kevin McCarthy criticizing Biden’s decision to proceed with his travel plans, he is also confident that a deal will be done as congressional leaders have now scheduled a narrower round of staff-level talks, which in the words of McCarthy “we have a structure to find a way to come to a conclusion.”
Will markets rip higher when a deal is announced?
Not likely…..a more orderly mild upside move the expected reaction.
Once a deal is struck, it will be the 79th increase to the debt limit since 1960…..the US has never defaulted on repaying its debt.
Successful negotiations and the right outcome are already priced in.
The debt ceiling impasse is a fleeting influence.
Persistently high inflation, deteriorating macroeconomic data flow, global growth concerns, US banking sector stress……these more enduring and blockers to a sustained run of risk-on conditions.
Debt ceiling headlines aside, it’s been a quiet 24 hours.
GDP for the Japanese economy printed stronger than expected, however the JPY has not benefitted given bond yields are higher across the globe. The BoJ is the outlier – the only major central bank to still be administering a yield curve control (YCC) policy….the yen underperformers when bond yields firm.
Climbing through 86.00, NZDJPY (+1.40%) reaches its highest level since 20 December. On that day the pair plummeted close to 5% as the BoJ announced a surprise YCC tweak, widening the band on the 10-year JGB from 25bps to 50bps.
The Kiwi logs smaller gains against the GBP and AUD, rising around half-a-percent against both whilst adding around three-quarters-of-a-percent against the EUR.
The Kiwi once again trades through 0.94 against the Aussie, logging Wednesday’s high at 0.9405.
We’ll likely see NZDAUD volatility through today’s local session as AUS jobs numbers are released for April. The unemployment rate is expected to remain at 3.5% with ~25K new jobs created.
The key local event – the release of the New Zealand Treasury’s budget.
Whilst not likely to influence NZD direction, it will be keenly digested to determine its impact on households, businesses, the broader economy and RBNZ policy.
It’s a quiet night for market moving data releases, weekly US jobless claims the main focus. The 4-week average has increased from around 200K to start the year to just shy of 250K, last week.
It’s a sign that the US labour market is starting to meaningfully cool having absorbed ~500bps of Fed tightening.
Expectations for the Kiwi over the next 24 hours, range bound trade consolidating this week’s gains, a projected range of 0.6330 – 0.6380.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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