By Stuart Talman, XE currency strategist
Newsflow and volumes have been light to start the week given the US observing the Labor Day Holiday - cash equity and bond markets closed.
Lively price action is expected for the remainder of the week given a stacked US economic calendar delivers multiple readings on the state of the labour market. Friday's non-farm payrolls and unemployment rate are the data point headliners following JOLTS Job Openings, Challenger Jobs Cuts, ADP Employment Change and weekly jobless claims, earlier in the week.
ISM Manufacturing and Services PMIs are also presented.
The week's events likely shape the direction of trade for the remainder of the month/quarter. September has traditionally been a horrendous month for equity market bulls - the S&P500 and Dow have experienced their largest percentage losses since 1950 in the month of September. The S&P500 has fallen in each of the past four Septembers.
The obvious catalyst for a pronounced pullback in US equity markets is the Fed delivering a less dovish outcome than currently expected at the 18 September FOMC meeting which would likely be influenced by an August jobs report that rebounds from July's ugly numbers. Market pricing currently assigns just over a 30% probability of a 50bps cut. A non-farm payroll print at 150K+ and an unemployment rate at 4.2% or 4.3% likely extinguishes the quarter point option.
Given the US dollar sell-off became overstretched through the latter stages of August, a dollar rebound would be widely expected should US equity markets and other risk sensitive assets head south through September as the market dials back the pace of Fed easing for the remainder of 2024.
The New Zealand dollar already displays signs of topside exhaustion as a prominent swing-high forms just shy of 63 US cents at last week's highs, also 8-month highs.
Commencing the new week near 0.6240, the Kiwi's Monday morning bid quickly faded, NZD/USD offered throughout Asian and European trade to mark intraday lows a pip or so above 0.6220. Losses have been modestly pared through the US session, the pair falling around two-tenths of a percent to start Tuesday's local session in the 0.6230's.
Our key downside region to monitor in the near-term: 0.6190 to 06220. Four notable swing highs were formed within a couple of pips of 0.6220 in February, March and twice (double top) in June. The 23.6% Fibonacci retracement of the August ascent is located at 0.6193. If the Kiwi extends its pull back through this week, this region must hold to retain bullish momentum. In contrast, a decisive break below here likely returns the pair to the 0.6050 to 0.6220 range that price action for 2 x two-month periods during 1H.
To the day ahead, the sole tier 1 data release is the ISM Manufacturing PMI, projected to remain firmly in contractionary territory with a rebound from 46.8 in July to 47.5.
The PMI is based on a survey of purchasing managers in the manufacturing industry, who provide their assessment of various factors such as new orders, production levels, employment, supplier deliveries, and inventories. These factors are combined to generate the PMI index, which provides an overall snapshot of the manufacturing sector’s performance.
Given the heightened focus on labour market data, the employment sub-index will be widely observed having fallen to 43.4 in July, its lowest level since the pandemic. Another ugly reading may see odds of a quarter point hike climb.
A PMI miss would likely see USD sellers re-emerge whilst an inline or stronger-than-consensus result continues the USD correction.
Either way, we don’t anticipate NZD/USD moving too far away from the low to mid 0.62's.
Stuart Talman is Director of Sales at XE. You can contact him here.
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