NZD buoyed by election and hope of Middle East resolution
Daily Currency Update
The risk-off tone that enveloped markets leading into last week’s close eased through trade on Monday allowing the NZD room to pitch back above US$0.59. Markets tempered their aversion to risk amid hopes and expectations a resolution of some form will be brokered between Israel and Hamas before an all-out regional war is triggered. Having slipped below US$0.59, the NZD clambered its way back toward intraday highs at US$0.5930.With the outcome of the National General Election having little impact on NZD value outside an early knee-jerk uptick our attention turns now to US retail sales data ahead of key commentary from Fed Chair Jerome Powell. While US retail sales will prove key in assessing the underlying health of the US economy, this week’s commentary from Jerome Powell is the headline risk event.
The outperformance across rates and treasury yields hinges on expectations for Fed policy. With the labour market proving robust and inflation pressures sticky, we are attuned to signals from Powell as to whether the Fed will hike rates again this year. With financial conditions tightening naturally through the last 3 months, the question of more rate hikes is finely balanced and key in determining near-term NZD direction.
Key Movers
With markets tempering their aversion to risk through trade on Monday, investors were forced to backtrack moves entered leading into last week's close. The USD and DXY index retreated while the AUD, NZD, GBP and euro found support. Fears a full-scale regional war will envelop the Middle East abated amid hopes some form of peace resolution will be brokered, ensuring Iran and other leading regional players are not drawn into the conflict.Of course, tensions remain elevated and we expect the tete-a-tete between Israel and Hamas will continue through the foreseeable future, shaping risk demand and commodity prices.
While our attention remains with the Middle East, our focus shifts toward key commentary from Jerome Powell. Fed officials have indicated that naturally tighter financial conditions may be sufficient in containing ongoing inflation pressures. With the USD Q3 rise driven by elevated rates and yields, Fed guidance and policy expectations will prove key in shaping near-term direction.
Should Powell adopt a dovish tone and suggest this tightening cycle is over we can expect the dollar will give back ground won in recent months. The prospect of future hikes is finely balanced and we expect price action will reflect changes in market expectations leading into the next Fed policy meeting.
Expected Ranges
- NZD/USD: 0.5880 - 0.6050 ▲
- NZD/EUR: 0.5580 - 0.5680 ▲
- GBP/NZD: 2.0420 - 2.0720 ▼
- NZD/AUD: 0.9300 - 0.9400 ▼
- NZD/CAD: 0.8020 - 0.8120 ▲