By Stuart Talman, XE currency strategist
US exceptionalism was in full display in the final sessions to end the week, Friday's data docket serving up dismal PMIs for both the eurozone and UK economies, whilst in contrast S&P Global's composite PMI for the US improved from the prior month following an impressive upside beat for the services sector and an inline manufacturing PMI. In addition, UK retail sales missed the consensus forecast by a notable distance, marking its largest month-on-month decline in four months.
The dollar's 4Q surge shows no signs of slowing following a shallow three-day pullback earlier in the week. At Friday's highs the dollar index (DXY), a weighted measure of the dollar against 6 major currencies, ascended through 108.00, the first time this mark has been breached in over two-years. Dollar bulls could not sustain the upside surge which occurred following the release of EU and UK PMIs, DXY paring gains followed by consolidatory price action through US trade, ending the week just south of 107.50.
In 40 trading days since the 27 September swing low in the low 100.00's DXY has leapt close to 8%, and despite heavily overbought signals via momentum indicators, shows no signs of fading upside momentum.
Service sector activity which contributes over 75% to US GDP climbed from 55.0 the month prior to 57.0 (vs 55.3, expected), exceeding the most bullish of forecasts marking the fastest pace of expansion since March 2022. The manufacturing PMI printed in line at 48.8, rising from 48.5 in September. The divergence between US economic performance and its developed nation peers is stark and could be exacerbated should Trump follow through with promises of widespread tariffs.
Chief Economist at S&P Global Market Intelligence, Chris Williamson provided a succinct view of the US economy:
"The rise in the headline flash PMI indicates that economic growth is accelerating in the fourth quarter, while at the same time inflationary pressures are cooling"; "A concern is that growth remains heavily reliant on the services economy, with manufacturing production declining at an increased rate"; "However, the promise of greater protectionism and tariffs has helped lift confidence in the US good producing sector."; "Factories are meanwhile stepping up their purchases of imported inputs as they seek to front-run tariffs."
Logging an intraday loss of half-a-percent, the New Zealand dollar slide below 0.5840/50 support to mark fresh year-to-date lows, a few pips through 0.5820 before ending the week near 0.5830. The October 2023 low located a few pips above 0.5770 is now in play.
Across the North Atlantic eurozone PMIs followed ugly national level PMIs, again sounding the alarm re growth concerns. The Eurozone Composite PMI fell to 48.1 from 50.0 in October, marking the sharpest contraction in the bloc's private sector activity since the beginning of the year. The previously resilient service sector logged a contractionary reading for the first time in 11 months falling from 51.6 to 49.2 (vs 51.8, expected) sending a warning signal to the ECB the eurozone economy continues to weaken. Expected to again print at 46.0, the manufacturing PMI fell to 45.2, the second lowest reading of the past 12 months.
Having emphasised weak PMIs as a key factor for cutting the three main policy rates by 25bps on 17 October, ECB President Lagarde will again be cutting in December, and may opt for a double up, half-point cut should governing council members conclude rates are overly restrictive.
The euro was one of the weakest performers amongst the G10, EUR/USD shedding over half-a-percent to trade sub-104.00 for the first time in two years. The Kiwi logged a marginal loss versus the euro, NZD/EUR spiking through 0.5630 following the PMIs before handing back gains to end the week just south of 0.5590. Last week we flagged the formation of an ascending triangle pattern - a sustained topside break through 0.5600 resistance is required to confirm the pattern's bullish outcome.
Likewise for NZD/GBP, an ascending triangle has formed via trendline support that extends from the series of higher lows that commenced following the 30 October swing low with key resistance around 0.4675. PMI induced gains lifted to the pair to 0.4670 before easing off highs to end the week a few pips north of 0.4560.
Should year-end seasonality emerge to support pro-cyclical currencies, including the New Zealand dollar, look for these NZD/EUR and NZD/GBP resistance levels to cede.
To the week ahead, it’s a busy week for prices data - monthly CPI released across the Tasman, in addition to CPI for Tokyo (precedes the national level reading, and therefore more impactful) and eurozone HICP. The Fed's preferred inflation gauge, core Personal Consumption Expenditures also drops, projected to ease from 2.8% to 2.3%.
It's a busy week on the domestic docket, retail sales released today, followed by the RBNZ meeting, Wednesday. A follow-up 50bps cut from Governor Orr and his fellow board members is the likely outcome lowering the OCR to 4.25%.
Further downside remains the path of least resistance for the Kiwi until a catalyst emerges to induce either a USD pullback or at the very least USD consolidation. Sub-58 US cent levels could be tested in the week ahead.
Stuart Talman is Director of Sales at XE. You can contact him here.
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