NZD continues upward push despite grim domestic economic outlook
Wednesday 18 January, 2023
Daily Currency UpdateThe NZD pushed back above US$0.64 Tuesday, consolidating Monday’s run higher despite domestic data sets highlighting a sharp decline in business and consumer confidence as activity indicators fall to near 50-year lows and the economy is squeezed by growing stagflation pressures. Price action across NZ rates fell as markets tempered expectations for RBNZ rate activity. Inflationary pressures remain elevated, yet activity indicators and consumer surveys show clear signs a deep and protracted recession is looming. The RBNZ faces a tough decision. Does it place more weight on the decline in consumer confidence or persistent inflation pressures? Thus far, market pricing suggests policy makers should lean toward easing the burden of rate hikes recalling bets for a 75-point adjustment next month and instead pricing in a 50-point hike.
Despite the grim domestic portrait, the NZD consolidated a break above US$0.64, marking intraday highs at US$0.6436. With near-term resistance in place on moves above US$0.6460, we are keenly attuned to any further weakening in the USD, and a sustained upswing in risk demand as optimism surrounding the global growth outlook continues to improve.
Key MoversWith ample news flow and data to digest, price action across majors was mixed as the euro underperformed and the GBP outpaced most counterparts. Euro area rates plunged after Bloomberg reported European Central Bank policy makers were starting to consider a slower pace of adjustment, pivoting away from guidance proffered by President Lagarde in December. With a 50-point hike all but priced in next month, there is gathering support within the European Central Bank to temper the pace of future adjustments with a 25-point increase in March well bid. The correction in European Central Bank rate expectations drove euro area rates lower and dragged the currency toward intraday lows below US$1.0780.
In contrast, the pound outperformed all other majors as robust labour market data helped fuel a run through US$1.22 and US$1.2250. While the pace of new hires slowed, conditions remain tight, with unemployment comfortably below 4% and wage growth, excluding bonuses approaching 20-year highs. Labour market resilience has fueled expectations for further Bank of England rate hikes, with the market pricing an increased chance of another 50-point hike in February. Having touched intraday highs at US$1.2294, the pound has edged lower leading into this morning’s open and currently buys US$1.2276.
Against a backdrop of lower rates, the yen advanced, pushing the USD toward ¥128.30 ahead of today’s all-important Bank of Japan policy meeting. With policy makers struggling to control 10-year rates, it is clear the current yield curve control program is operating on borrowed time. With inflation gathering pace, even a small change in policy direction will have significant ramifications for global bond markets and the yen.
- NZD/USD: 0.6350 - 0.6460 ▲
- NZD/EUR: 0.5880 - 0.6000 ▲
- GBP/NZD: 1.8950 - 1.9220 ▲
- NZD/AUD: 0.9150 - 0.9250 ▲
- NZD/CAD: 0.8550 - 0.8650 ▲