By Stuart Talman, XE currency strategist
Despite annualised core PCE, the Fed's preferred inflation measure, printing softer-than-expected at 2.6% (vs 2.7%, expected), the US dollar extended its corrective bounce through US trade, the dollar index (DXY) logging a third consecutive intraday gain. A measure of the US dollar's value against a weighted basket of 6 currencies, DXY based near 100.50 earlier in the week, rebounding from 12-month lows to ned the week a few pips through 101.70.
The dollar's path for the remainder of 3Q will be heavily influenced by this Friday's US jobs report. Soft July data delivered jobs growth of 114K and an unemployment rate climbing from 4.1% to 4.3%, close to a three year high, fuelling concerns the world's largest economy was headed for recession. The July report was skewed by adverse weather - there were signs Hurricane Beryl impacted the number of workers who were either absent or laid off.
August's report is widely expected to normalise, non-farm payrolls projected at 163K whilst the unemployment rate is seen to ease back to 4.2%. Should these consensus forecasts prove accurate, a 25bs cut from the Fed on 18 September is a lock. In contrast, another weak payrolls number near 100K and the jobless rate ticking up to 4.4% ensures that 50bps in play.
With around 100bps of easing priced in across the remining three FOMC meetings, the market continues to entertain the idea the Fed will deliver a larger hike. A solid jobs report likely induces a readjustment in market pricing, in turn likely to add to the dollar's retracement.
Incoming data in the US continues to record an economy that is slowing from above-trend growth, however recession calls appear premature, aggregate demand remains robust, households continue to display resiliency.
The New Zealand dollar's ascent fell just short of 63 US cents through Thursday before a modest pullback materialised through Friday's sessions, NZD/USD falling through 0.6230 in early New York afternoon trade to then retrace through the second half of trade, ending the week a few pips below 0.6250.
Importers, we have been commenting most days last week that you have been presented with great levels - Friday's close within 70 pips of the year's high, marked on the first trading day of 2024.
Whilst it's premature to declare Thursday's high as a prominent swing high, the price action and technicals provide evidence to support the case.
The relative strength index, a widely observed momentum indicator has started to turn lower having reached oversold levels. The 38.2% Fibonacci retracement of the February 2021 to October 2022 downswing resides at 0.6258. Should the dollar rebound extend through the first week of September, ensuring the Fib level holds whilst the Kiwi slips back below 62 US cents, we'll back a topside exhaustion call with more conviction.
On balance, a reversal is likely to be modest as the market assesses both election and recession risk, the Kiwi expected to range between 0.6100 and 0.6300 through September.
Shifting our focus back to Friday's events, in addition to PCE, inflation data for Tokyo and the eurozone were also released.
CPI for Tokyo, which precedes the national level data point, and therefore carries more significance beat consensus estimates, annualised core, which excludes fresh food and energy printed at 1.6%, up from 1.5% the month prior. Headline increased from 2.2% to 2.6%, the equal highest reading over the past 9 months. The hotter inflation data adds to the case for a follow up hike from the Bank of Japan at the October meeting. Upcoming wages and household consumption data will be critical in determining the near-term path for BoJ policy.
Following the 16+% spiral from 38-year highs above 99.00, NZD/JPY has rebounded circa 10% from the 05 August swing low, closing last week in the 91.20's. The midpoint of the July-August plunge is located at 91.25 whilst the 200-day moving average resides just north of 92.00. The low 92.00's provided notable resistance earlier in the year. We monitor the 91.50 to 93.00 region for signs of corrective exhaustion.
In the eurozone, headline inflation dropped from 2.6% to 2.2%, as expected whilst core remained steady at 2.6% (vs 2.7%, expected) - the fall in headline predominantly due to falling energy prices. Swaps markets favour a 25bps cut at the ECB's 12 September meeting with close to 40bps priced in for the final two meetings of the year.
Having marked 12-month highs around 1.1200 two weeks ago, EUR/USD upside momentum, like its major peers, has stalled suggesting a medium-term peak has now formed.
Given the Kiwi was the strongest performing major through August, NZD/EUR has ratcheted higher in recent weeks, concluding last week over 5% higher from the 05 August panic low. Upside momentum looks to be slowing around 0.5650 signalling consolidative trade in the run up to the ECB meeting.
In other tier 1 data news from Friday's sessions, retail sales growth across the Tasman was flat in August (vs +0.1%, expected), erasing from +0.02% in July. Australia is currently in the midst of the most prolonged drop in real per capita retail sales since record keeping began around 40 years ago. Despite this, the RBA will not be entertaining rate cuts given sticky inflation remains uncomfortably high.
Given the soft result, NZD/AUD reversed most of the prior day's losses, reclaiming territory north of 0.9200 to close the week around 0.9230, the antipodean cross's highest weekly close since mid-June. Opening the new week above both the 200-day moving average and midpoint (0.9212) of the February-July sell-off, NZD/AUD retains its bullish bias. That being said, topside exhaustion is expected in the 0.9250 - 0.9300 region given economic fundamentals and central bank relativities favour AUD outperformance.
Looking to the week ahead, the aforementioned US jobs report is the headliner amidst a busy week for US labour market data. ISM PMI's also of keen interest on the US docket. Other tier 1 releases include GDP for the eurozone and Australia, Caixin PMIs, the Bank of Canada meeting and eurozone retail sales.
The expected path for the Kiwi?
Assuming a solid non-farm payrolls print and an in-line unemployment rate at 4.2%, the dollar's corrective path to extend higher, in turn pushing NZD/USD into the low 0.62's…..perhaps below 0.62.
Stuart Talman is Director of Sales at XE. You can contact him here.
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