By Stuart Talman, XE currency strategist
Markets traded cautiously ahead of the weekend's first round of French elections which have the potential to be one of the most important legislative elections in France's modern history.
US treasury yields popped higher, creating a modest headwind for US equity markets - the three major indices tracking lower into quarter-end with the Nasdaq leading the broader market lower, shedding three-quarters-of-a-percent.
In currency land, the Australian dollar continued its recent run of outperformance, continuing to benefit from the stronger-than-expected monthly CPI data. Released mid-week, hot inflation data has raised the implied probability of an RBA cut in August to a near 50/50 proposition. The Aussie was the strongest weekly performer amongst the G10, gaining just shy of half-a-percent.
Logging a modest intraday gain, the New Zealand dollar rebounded from six-week lows a couple of pips below 0.6060, trading back above 61 US cents before ending the week near 0.6090. The Kiwi's week-on-week result of -0.44% was a middling performance amongst the G10.
Having outperformed most of its major peers in recent weeks the dollar's ascent was checked during Friday's US session following the release of in-line Core Personal Consumption Expenditures data (PCE), the Fed's preferred inflation gauge. Printing at 0.1% MoM, equating to a drop in annualised core PCE from 2.8% to 2.6%, it was a good result for those constituents eager to see the Fed commence cutting rates.
Rates markets now assign a greater than 70% implied probability that Jerome Powell and his colleagues deliver a 25 bps cut at the 18 September FOMC meeting.
Another month of lower prices data in addition to further softness in the labour market may be enough to compel the Fed to deliver a pre-election cut.
The week ahead is stacked with US jobs data, JOLTS Job openings, Challenger Job Cuts, ADP Employment change and weekly claims data the curtain raisers to Friday's main event - the Bureau of Labor Statistics official employment report (NFP, UE and average hourly earnings).
Having fallen to 3.4% in 1H 2023, the unemployment rate touched 4.0% in May. An extension through 4.0% whilst CPI/PPI/PCE continues to ease will be the greenlight for the Fed to pull the easing trigger.
A busy week ahead in the US also delivers the ISM PMIs and FOMC minutes.
Regionally, Japan's Tankan survey, Caixin PMIs and trade balance and retail sales data across the Tasman are the data points of note. RBA meeting minutes are also released, more compelling than usual given the RBA now presents as the most hawkish developed nation central bank.
It’s a huge week for the eurozone.
Whilst EU level inflation and retail sales data will be closely observed, developments in French politics will capture the most attention.
John Lichfield of Politico writes:
All elections are important, but some are Earth-shaking.
The upcoming parliamentary election in France could be the most destructive since the war — not only for France, but also for the European Union, the Atlantic alliance and what remains of the post-war liberal world order.
France’s leadership position in the EU, its seat on the U.N. Security Council and its military reach as a global power make this almost as much of a “world election” as Biden vs. Trump in November.
The rise of Marine Le Pen's far-right National Rally (RN) is unfolding as the results from the first round of the legislative elections are released as the Morning Update goes to print.
RN is projected to claim around 34% of the vote ahead of Marcon's Together alliance, expected to win just over 20% and The New Popular Front - a left-wing coalition with just under 30%.
It’s the first of a two-round vote. In the second round the top two contenders progress with a third party eligible to contend should they claim 14% of the registered vote. A historically high voting turnout for round one suggests a three-way contest in round two.
Three candidates rather than two benefits RN in its attempts to form a majority government.
The round one result will likely cause French-German bond yield spreads to further widen beyond 80 bps, a 12 year high. In turn the euro is likely to commence the new week gapping lower and under pressure.
Having failed to punch through a 0.5730/50 major resistance level, NZD/EUR likely mounts another attempt this week. The Kiwi shed -0.61% against the euro last week to close in the 0.5660's.
Against the dollar, the week's soft close below 61 US cents suggests further downside is ahead. The convergence of the widely observed 100- and 200-day moving averages occurs in the 0.6060's whilst the 38.2% Fibonacci retracement of the April to June rebound is located at 0.6081.
Price action moving below a 0.6050/80 support zone would see NZD bears gaining the upper hand.
Stuart Talman is Director of Sales at XE. You can contact him here.
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