By Stuart Talman, XE currency strategist
Risk sensitive assets enjoyed another productive week as the market stress of two weeks ago fades from memory - sentiment, this past week, buoyed by benign US inflation data (via both PPI and CPI), a moderation in weekly jobless claims and a stronger-than-expected retail sales print, indicative of ongoing resilience amongst US households.
Extending its winning streak across a seventh day, the S&P500's week-on-week gain of +3.9% was its best since October, whilst the Nasdaq lead the way, gaining over 5%. From their swing lows on 05 August, the S&P500 and Nasdaq have now climbed over 8% and 12% respectively as the market dials back its fear levels regarding a hard landing.
In turn, pro-cyclical currencies have benefitted from the re-leveraging, the New Zealand dollar sitting atop the G10 leaderboard through Friday's sessions, adding +1.67%. Friday's impressive gains lifted the Kiwi into positive territory for the week, logging a week-on-week gain of +0.90%.
The British pound was the strongest weekly performer amongst the G10, advancing +1.45% to sustain its standing as the most resilient major. Despite softer-than-expected CPI data, GBP/USD benefitted from solid GDP and retail sales prints and more broadly the market's brightening mood.
Friday's rebound lifted the Kiwi back through 0.6050 following Thursday's, and the week's swing lows forming in the 0.5970's. Importantly for NZD bulls, a third week of gains has lifted NZD/USD above the mid-point of the July-August downswing with the week's close a pip or so below 0.6050 marginally higher than the widely observed 100-day moving average.
The next upside NZD/USD hurdle presents at 0.6080, the 38.2% Fibonacci retracement which, bar a few pips or so, coincides with last week's swing high which occurred prior to the RBNZ's 25bps hike, Wednesday. Should price action extend its run higher through 0.6080, this week, and re-establish a foothold above 61 US cents, a path likely presents to re-test the 08 July high a few pips north of 0.6150.
A mellower economic calendar for the week ahead presents S&P Global PMIs for the US, UK and eurozone whilst onshore, retail sales is the domestic headliner. FOMC and RBA minutes also drop.
The week's main event occurs in the mountains of Wyoming - the Superbowl for central bankers: the Jackson Hole Symposium.
Fed Chair Powell is scheduled to speak at 2am, Saturday.
Lackadaisical price action may be the state-of-play for much of the week as market participants refrain from executing positioning calls ahead of what can be a pivotal event.
Jackson Hole is primarily an academic event, attracting around 120 economists to discuss a set of curated papers centred on a policy relevant theme. It has evolved to be an important platform for central bank messaging, Federal Reserve Chairs using the Friday morning address to signal any changes in policy and/or the outlook. At the 2022 edition, Chair Powell delivered an infamous 8-minute speech, proclaiming the Fed was determined to stamp out multi decade high inflation, and in the process, likely inflicting pain on the US economy.
Following the wild swings in market pricing over the past few weeks which at the height of panic (05 AUG.), called for over 5 x 25bps cuts before year-end, the focus for Powell's speech will be on any signals that confirm whether the 18 September FOMC meeting will deliver a quarter or half point cut.
We're likely to witness a balanced Powell, no-committal to either 25 or 50 bps, rather simply stating the time is right for the Fed to commence easing the target rate.
Whilst market pricing has been scaling back the implied odds of a half-point cut next month, the odds still appear too high at circa 30%. Back on 05 August when risk assets were hammered following the BoJ hike and weak July jobs report, a 50bps hike was fully discounted. Now, the market calls for less than 100bps of easing for the remainder of the year.
The key events between now and 18 September that will determine the increment of the Fed's first cut: August employment data , released on 06 September and CPI, released on 12 September. Barring a sizeable downside miss for non-farm payrolls or a significant step-down in inflation, Powell and his FOMC colleagues will opt for a quarter-point cut.
Expectations for the New Zealand dollar's path this week?
We suspect consolidatory price action with a mild upside bias may be the state-of-play in the lead up to Jackson Hole, NZD/USD to range between 0.6000/80. The tone of Powell's speech in the early hours of Saturday morning to dictate whether a more pronounced move for the week materialises.
Stuart Talman is Director of Sales at XE. You can contact him here.
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