By Stuart Talman, XE currency strategist
Negative risk sentiment has permeated markets to start the new week: US treasury yields and the dollar are higher, as is crude oil as Israeli forces stepped up their offensive against Palestinian militants. Risk sensitive assets underperform: the S&P500 and Dow pulling back from all-time record highs whilst the New Zealand and Australian dollars occupy two of the three bottom rungs on the G10 ladder.
In a week that is relatively quiet for global macroeconomic data releases, geopolitics and evolving US election odds and polling are likely to have a greater influence on short term direction. Also in focus, the IMF meeting, bringing together central bank heads and finance ministers from across the globe in addition to Putin hosting a summit of BRICS leaders. It’s a busy week for central bank speak as the IMF soirée delivers a constant flow of speeches and panel discussions from Fed, ECB and BoE officials.
The dollar extends its run higher, stronger across the board, the dollar index (DXY) reversing all of Friday's modest pullback to ascend within a few pips of the 104.00 mark, its highest levels since late July. Of technical importance, DXY now challenges the widely observed 200-day moving average which, if cleared, could initiate a fresh wave of USD buying. The DXY last sustained prolonged price action above the trend following indicator in March through June, when year-to-date highs were marked just north of 106.50.
Reversing in late September, DXY is now close to 4% above then 14-month lows, catapulted higher by the mix of stronger US macro data, rates markets dialling back the speed of Fed easing and improving odds of a Trump election win.
Commencing the new week in the 0.6060's following Friday's modest rally, the New Zealand dollar was initially bid, climbing into the 0.6080's through the first half of Asia trade. Sellers emerged in later afternoon trade and from here it was all one-way action, NZD/USD shedding over 50 pips to log Monday's lows a couple of pips below 0.6030.
Notably, Monday's sell-off drops the Kiwi below key 0.6050 support and the 61.8% Fibonacci retracement of the aggressive August-September rally, increasing the probability for NZD/USD to once again, trade sub-0.60.
The near-term critical downside zone to monitor this week: 0.5980 - 0.6000.
Looking back to May 2023, support has been located in this zone on four occasions. Failure to hold could compel sellers to drive NZD/USD back down towards 2024's 0.5850 double bottom.
The market aligning with the Fed (re the magnitude of easing at the remaining two FOMC meetings), the recent run of robust US macro data, disappointment regarding China's underwhelming stimulus announcements, an escalation of Middle East tensions and Trump’s improving election win odds: all current drivers that have been baked into the price of the USD versus its major peers.
It's reasonable to expect that some of these influences will subside as we head into the final stages of the year, thereby ending the dollar's recent outperformance. Certainly, year-end seasonality supports a softer dollar.
To the day ahead, the economic calendar is subdued, domestic trade balance the sole data point of note, but unlikely to influence the Kiwi's short-term direction. BoE Governor Bailey and ECB President Lagarde headline a busy 24 hours of central bank speakers.
We suspect the New Zealand dollar will remain under pressure, extending further into the low 0.60's.
Stuart Talman is Director of Sales at XE. You can contact him here.
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