NZD recovers as inversion in US yield curve points to recession
Daily Currency UpdateThe New Zealand Dollar outperformed through trade on Monday, recovering Friday’s post non-farm payroll sell off, extending back toward 0.63 US cents. Having edged lower through the domestic session the NZD came under pressure following a correction in RBNZ inflation expectations marking intraday lows at 0.6230. Tracking sideways into the overnight session markets then looked passed headlines suggesting China will extend military exercises around Taiwan and instead focused on US economic fortunes and Fed policy expectations. Having digested Friday's stronger than anticipated US non-farm payroll print markets looked beyond the immediate policy implications toward medium term recession fears. The steady inversion of the 2 year vs 10 year yield curve and a further widening in yield spreads suggest the world’s largest economy will plunge into recession before Q1 2023, weighing on the USD and allowing the NZD to extend back above 0.63. Having touched intraday highs at 0.6303 the NZD edged marginally lower into this morning’s open where it currently buys 0.6280 US cents. With only second tier data on hand Tuesday we expect ranges will remain between 0.62 and 0.6350.
Key MoversThe US dollar underperformed through trade on Monday, giving up some of Friday’s post non-farm payroll gains as market focus shifted away from near term rate implications toward medium term recession fears. Treasury Yields retreated, giving up the upturn in rates enjoyed on Friday, prompting a further widening in 2 year vs 10 year yields as markets begin pricing in a correction in Fed policy expectations through 2023. Having prepared for a 75 basis point hike next month, investors now expect the Fed’s aggressive program of rate adjustment will kill the economy and force policy makers to unwind rate hikes in H2 next year. The inversion of yield curves now serves as a strong indicator the US economy will be tipped into recession. The questions now is not if but how deep will the recession be.
In other news the Euro struggled to take full advantage of Dollar weakness, following reports Norway will be forced to curb electricity export. An exporter in Hydro-generated electricity Norway has elected to curb energy export as its Hydro lakes reach new lows prompting calls for reservoirs to be re-filled rather than stretch supplies to prop up the continents embattled energy market. The report only exacerbates Europe’s Energy crisis leading into Winter and ensured the Euro would trade flat on the day.
With little of note on today’s macro ticket our attentions remain with US yield curve adjustments in pricing direction leading into Wednesday all important inflation print.
- NZD/USD: 0.6230 - 0.6320 ▲
- NZD/EUR: 0.6080 - 0.6150 ▲
- GBP/NZD: 1.9120 - 1.9380 ▼
- NZD/AUD: 0.8980 - 0.9050 ▼
- NZD/CAD: 0.8050 - 0.8150 ▲