By Stuart Talman, XE currency strategist
Risk sentiment deteriorated into the week's close amidst rising concerns a step-up in the Israel-Hamas conflict would trigger the involvement of Iran and the US as the Israeli army organised troops on the Gaza strip border.
European equity markets lead global equities lower, the Euro Stoxx 50 and Dax both falling over 1.50% as haven flows were the order of play. Bond yields fell and safe haven currencies outperformed as did oil sensitive currencies (CAD & NOK) as crude oil surged over 5%, WTI ripping through US$87/barrel.
Falling around three-quarters-of-a-percent, the New Zealand dollar was the worst performer amongst the G10, adding to Thursday's retreat from territory north of 60 US cents, closing the week a few pips above 0.5880.
Earlier in the week, risk sensitive assets, including the New Zealand dollar performed well, the Kiwi advancing through 0.6050 at Wednesday's highs as US treasury yields pulled back from 16-year highs. Having peaked through 4.88%, the week prior, yield on the benchmark 10-year bond closed the past week near 4.60%, ending a run of five consecutive week-on-week advances.
Treasury yields looked to have topped out in the short-term given the chorus of recent dovish Fed-speak and the geopolitical safe-haven bid, driving bond prices higher (yields lower). Multiple Fed officials have expressed the view that September's remarkable bond yield advance has replaced the need for the Fed to hike one more time before year-end.
That being said, should yields continue to track lower whilst US macroeconomic data continues to represent a resilient US economy, a late cycle rate hike is back in play. Crude oil resuming its march towards $100 amidst rising geopolitical concerns may also factor in the Fed resuming its tightening cycles.
Looking to the week ahead, it will be interesting to note the New Zealand dollar’s open.
Given rising risk aversion through Friday’s sessions, a softer open would be anticipated. However, given the resounding election win by the Nationals, the Kiwi may attract an early-week bid given the change in government is perceived as a positive for the domestic economy and therefore the New Zealand dollar.
No doubt we’ll be fielding many questions this week regarding the election result’s impact on the Kiwi. Whilst there may be a short-term impact, political developments in stable developed economies typically don’t influence medium term trends. The Kiwi’s direction will continue to be decided by global factors.
Locally, the headline event for the week ahead is 3Q CPI, annualised inflation expected to modestly cool from 6.0% to 5.9%. Non-tradeables (domestic) inflation continues to run uncomfortably hot and may require the RBNZ to resume its tightening cycle in early 2024.
Regionally, China activity (GDP, industrial production and retails saes) data and Aussie jobs numbers are the other tier 1 data releases.
It’s a busy week for UK data – employment numbers, CPI and retail sales all released.
It’s a quiet week in the US – retail sales the sole tier 1 data point. Third quarter earnings season commenced on Friday following some of the major US banks reporting.
Following Friday’s soft close and the Kiwi’s ~150pip plunge from Wednesday’s highs, NZDUSD sets-up to test the year-to-date low, located a pip or so below 0.5860. An escalation in the Israel-Hamas conflict looms as the catalyst for a further deterioration in risk sentiment.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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