By Stuart Talman, XE currency strategist
Wednesday's risk rally has been extended through Thursday's sessions, US equity markets adding to yesterday's impressive gains as positive sentiment benefits most asset classes. Commodity linked currencies outperform amidst a sea of green across energy, metals and agricultural commodity markets. For now, global growth concerns that had plagued markets in recent months, have receded.
Throughout this week, the bulk of New Zealand dollar price action has occurred between 0.6130 to 0.6160. Following an unstained dip below 0.6110 following the release of Wednesday evenings US CPI data, NZD/USD has formed a bullish swing higher and now looks well placed to ascend into a higher range as price action moves beyond 0.6160.
We commented yesterday that improvement back up through 0.6150 (is) required to confirm a near-term swing low for the Kiwi. Whist this has occurred, with yesterday's tail forming a textbook basing pattern, it's premature to declare the near-term bias has shifted to positive. We'd need to see NZD/USD price action re-testing and ascending through 0.6220 resistance to confirm NZD bulls are in control.
Rather, ahead of next week's headline event, Wednesday evening's FOMC meeting, we suspect range trading may the state-of-play ahead of what is now a widely expected 25bps cut to commence the Fed's easing cycle.
The Fed is one of several major central banks that will be cutting through September, the latest being the ECB, lowering its three major policy rates, overnight. The key takeaways:
- ECB cuts deposit rate by 25bps to 3.50%
- Growth forecasts modestly lowered; inflation forecasts retained
- ECB refrains from offering any form of forward guidance
Wednesday's cut is the second of the cycle and comes as the inflation backdrop continues to moderate. Via the ECB statement:
Recent inflation data have come in broadly as expected, and the latest ECB staff projections confirm the previous inflation outlook. Staff see headline inflation averaging 2.5 per cent in 2024, 2.2 per cent in 2025 and 1.9 per cent in 2026, as in the June projections. Inflation is expected to rise again in the latter part of this year, partly because previous sharp falls in energy prices will drop out of the annual rates. Inflation should then decline towards our target over the second half of next year.
Both the accompanying statement and Lagarde's press conference refrained from offering any forward guidance as the ECB will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.
With two remaining monetary policy meetings for the year, the base case is for a pause at the 17 October meeting followed by a third cycle cut to end the year on 12 December.
The euro rallied following Thursday's cut, EUR/USD extending higher from the key 1.1000 level to trade through 1.1060. Twelve-month highs were marked late August a pip or so through 1.1200.
The Kiwi has held its ground versus the euro, NZD/EUR probing the top of a four-day trading range, peaking through 0.5580. Should the pair reclaim territory north of 0.5600 to re-test both the 100- and 200-day moving averages a path opens to move beyond the late August swing high, located a few pips through 0.5660.
Looking to ahead to the final sessions of the week, locally, the Business NZ PMI is released, a leading indicator gauging business activity in New Zealand’s manufacturing sector. Readings have been notably bleak in recent months. It’s likely to be a quiet offshore session with the Uni of Michigan Consumer Sentiment Survey the sole tier 1 event. On Saturday, China releases activity data via Industrial Production and Retail Sales numbers.
Can the Kiwi end the week above 62 US cents?
Unless US equities replicate Wednesday's outsized gains, this may be asking too much…..NZD/USD to end the week within proximity to 0.6150.
Stuart Talman is Director of Sales at XE. You can contact him here.
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