Upbeat earnings from major US banks drive US stocks to fresh 15-mth highs, yields mixed, WTI crude up, gold up, dollar mixed. RBA minutes acknowledge additional tightening may be required

By Stuart Talman, XE currency strategist

Strong earnings results from the big US lenders have driven US equity markets higher, the S&P500, Nasdaq and Dow all extending to levels not seen since April 2022. Despite downside US data misses via retail sales and industrial production, strong second quarter earnings from Bank of America and an upbeat outlook from Morgan Stanley bolstered US stocks that were already on the front foot following last week's softer than expected consumer and producer prices data.

Sentiment has leaned positive through July, risk assets benefitting from the mix of slowing inflation and global macroeconomic data flow indicative of developed economies that remain surprisingly resilient amidst one of the most aggressive synchronised global monetary tightening cycles.

Amongst the G10, the New Zealand dollar is the notable laggard given net intraday moves for the majors have been relatively tight through Tuesday. The Kiwi aside, the majors have traded within a gain or loss of a third-of-a-percent against the dollar. Following last week's pronounced dollar sell-off and this week's quieter economic calendar, it was reasonable to expect consolidative price action ahead of next week's FOMC meeting.

Falling around three-quarters-of-a-percent, logging a third day of losses, NZDUSD has failed to maintain a foothold above 63 US cents, giving up over half of last week's upside surge.

Mostly ranging between 0.6810 and 0.6840 during local trade, the Kiwi was offered through the London morning. A weak global dairy auction, overnight has further compelled the NZD sellers, pushing the pair to an overnight low at 0.6360 as the US session commenced.

The Kiwi's underperformance may also be linked to expectations for today's second quarter CPI report. Given the recent run of downside inflation reads for other developed economies (including Canadian CPI, overnight), NZD longs have been trimmed ahead of the week's headline domestic event.

Having peaked at 7.3% 12 months ago, NZ CPI is expected to fall from 6.7% to 5.9% through 1H. A soft CPI print increases the likelihood the RBNZ's tightening cycle has reached an endpoint with a current OCR at 5.50%.

The RBA, on the other hand, maintains a tightening bias despite on hold decisions at 2 of its past three meetings.

Minutes release yesterday for the July meeting recorded that whilst board members acknowledged the deteriorating growth outlook, and a cash rate now in clearly restrictive territory, labour market tightness continue to apply upward pressure to inflation and therefore additional tightening may be required.

Thursday's jobs report for the Australian economy will be an important input in deciding whether the RBA hikes on 01 August. Ultimately, second quarter CPI, released 26 July shapes as the deciding factor.

The Kiwi has tipped over against the Aussie, peaking a pip or so through 0.9320 on Monday. Two days of selling has pushed NZDAUD back through the 100-day and 200-day moving averages in addition to the mid-point (0.9215) of the June-July rebound. These technical developments signal that a short-term swing high has formed. 

Looking to the day ahead, the headline event, arguably for the week, is the June UK CPI report. Expectations are for annualised headline inflation to decline to 8.2% from 8.7%, but with the core metric projected to remain at 7.1%. The prior release was an unwelcome upside surprise with the headline rate remaining at 8.7% vs. the BoE forecast of 8.3%, whilst core inflation unexpectedly advanced to 7.1% from 6.8%.

The UK, more than any other developed economy, is at risk of secular inflation producing a pronounced period of stagflation (high inflation/low growth).

The pound's reaction to CPI data has been mixed, at some points strengthening due to the hawkish repricing of BoE policy, whilst more recently weakening on the stagflation narrative.

The Kiwi remains pressured against the pound, NZDGBP struggling to base around 0.4800, looking vulnerable to further downside and fresh 3+ year lows.

It’s a big day on the US earnings calendar with Tesla, Netflix and IBM reporting.

Having broken down through 0.6311, the 23.6% Fibonacci retracement of the May-July rally, our focus shifts down to the next Fib level at 0.6249 which also corresponds with the 16 June swing high ... will it be a case of old resistance forms new support or will the Kiwi's decline extend through a fourth consecutive day?

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