By Stuart Talman, XE currency strategist
Stronger than expected retail sales data for the US economy has aided the dollar's plight, gaining for a second day to reverse some of last week's CPI induced losses. However despite the consumer spending beat, the yield on the benchmark US 10-yrear note continues to probe levels below 4.20% on the view the Fed will be cutting two, maybe three times before year-end as activity levels in the world's largest economy continue to cool.
The headline retail sales data point, as expected, printed flat for the month of June, however the Control Group printed a month-on-month gain of 0.9%, up from the prior month's 0.4% result, the fastest pace observed since April 2023.
The control group is all sales excluding receipts from auto dealers, building-materials retailers, gas stations, office supply stores, mobile homes and tobacco stores. This filtered number is a more precise method of gauging consumer spending and is used to calculate GDP.
The data is representative of a still resilient consumer and more broadly an economy that is in pretty good shape, albeit displaying notable signs of cooling over the past couple of months.
Offered steadily through Asian trade, the New Zealand dollar halted its slide around critical 0.6050 support heading into the commencement of European trade, paring losses to trade near 0.6070 prior to the release of the retail sales data. The key support level caved following the data, NZD/USD intraday lows marked in the 0.6030's, the pair falling to its lowest mark since mid-May.
We flagged the importance of 0.6050 in Monday's update - a downside break below would coincide with price action trading back below the widely observed 100- and 200-day moving averages. The Kiwi has traded above the trend following indicators since 15 May, surging from the low 0.6000's following the receipt of softer than expected April US CPI data.
Price action moving decisively below the 200d MA is widely relied upon as a bearish entry trigger for traders, potentially opening a path for further NZD/USD downside. Having peaked a couple of pips through 0.6220 on 12 June to then form a lower swing high a few pips above 0.6150 on 08 July, a topping pattern has formed driving the Kiwi back into the 0.6050 to 0.6220 range that has contained much of the past 6 month's price action.
The current consideration: does the Kiwi stabilise around the bottom bound of this range or will sub-0.6000 levels again materialise as they did through April when an impressive run of macroeconomic data fueled the US exceptionalism narrative.
The incoming data flow and Fed reaction function are the key factors.
The bond market projects the Fed to cut twice, with maybe a third cut to round out the year. Should the US data flow steady or pick up, rate cut expectations will hawkishly reprice to one to two cuts. In this scenario, the Kiwi likely slips below 0.6000.
Conversely if the recent trend in slowing employment growth/rising unemployment and sluggish PMIs continues, the bond market will be vindicated - the Fed hikes in September with 25bps cuts to also follow at the November and December FOMC meetings.
Via this path, NZD/USD downside is capped near current levels, a re-test of 0.6200/20 resistance occurs in the months ahead.
Looking to the day ahead the week's headline domestic event, 2Q CPI presents, headline inflation projected to fall from 4.0% to 3.5%. Amongst the sub-readings, most of the attention will be on non-tradeables, aka, domestic inflation which last printed at 5.8% in the 12 months to March 2024.
The RBNZ's forecast is for headline to print at 3.6% whilst non-tradeables is projected to fall to 5.3%.
A downside surprise would validate last week's dovish pivot from the RBNZ, raising expectations of an OCR cut, perhaps as early as next month…..but more likely at the October or November meetings.
We'll be observing NZD/AUD price action given the antipodean cross has breached the 0.9000 mark for the first time since October 2022. A soft CPI report suggests another pronounced leg lower, setting up a test of the September 2022 swing low in the low 0.87's.
Other events to note through Wednesday: UK CPI, core projected to remain steady at 3.5% and the Fed's Beige book.
The domestic CPI print likely determines short term direction for the Kiwi. Soft data: NZD/USD falls further into the low 0.60's……hot data, the pair trades back above 0.6050 support.
Stuart Talman is Director of Sales at XE. You can contact him here.
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