NZD outperforms as end to US rate hikes nears
Friday 5 May, 2023
Daily Currency UpdateThe New Zealand dollar was the best performing major currency Thursday, extending gains through US$0.6250 and eyeing a break above US$0.63. There is no obvious catalyst behind the days upturn with little domestic data on hand and no major offshore data shocks. We can only point to an ongoing yield advantage as the source of support for the NZD. The RBNZ remains steadfast in its commitment to neutralising inflation and with more US bank casualties emerging through trade on Wednesday, markets have pared back Fed rate expectations. PacWest Bancorp and Western Alliance stock prices both plunged through trade on Thursday after it was reported they were considering a breakup, capital raise, or potential sale. While First Horizon stock price plummeted after its buyout by Toronto Dominion failed in the wake of regulatory issues. While market fears of widespread collapse are not as pronounced as the initial March shock, the deterioration of lending conditions that will follow this crisis add further weight behind calls for an end to the Fed’s tightening cycle. With the Fed hinting at a pause in Wednesday FOMC policy update, questions are now being asked if they have moved too far too quickly, exacerbating pressures on smaller regional banks and the domestic real estate market. Having pulled back off US$0.63 the NZD opens this morning buying US$0.6280 and remains elevated against the euro, GBP, AUD and yen. Our attentions turn now to US nonfarm payroll numbers. We expect a further moderation in jobs growth and a small uptick in the unemployment rate. With labour market performance a key driver behind Fed policy a print outside consensus expectations could spark volatility into the weekly close.
Key MoversThe euro was the worst performing major through trade on Thursday, giving up over half a percent as European rates fell following the ECB’s neutral policy update. Despite raising rates by 25 basis points and affording clear indications there was more ground to cover the ECB failed to meet the markets hawkish expectations, with many anticipating a 50-point rate adjustment and a promise of sustained aggression through the near term. The euro tumbled through 1.10 before finding support, edging higher to buy 1.1011 on open this morning.
Global rates faced added pressure as calls for the Fed to end its tightening cycle grow, following reports of three new US bank causalities. PacWest Bank, Western Alliance and First Horizon are all expected to default in the coming days, raising concerns the Fed has tightened too much too quickly. Just hours after the Fed hinted at a pause to the current tightening cycle there is a growing chorus for policy makers to delay future rate hikes and avoid the collapse of the US’s small banking market. With US treasury yields tracking lower and global rates on the back foot, the Japanese yen found support. The USD touched intraday lows below 133.50 before pulling back above 134 and seems to have given up near-term hopes of a push back toward 140.
Our attentions today turn to US non-farm payroll data. We expect a further moderation in jobs growth and a small uptick in the unemployment rate. With labour market performance a key driver behind Fed policy a print outside consensus expectations could spark volatility into the weekly close.
- NZD/USD: 0.6220 - 0.6320 ▲
- NZD/EUR: 0.5580 - 0.5750 ▲
- GBP/NZD: 1.9920 - 2.0280 ▼
- NZD/AUD: 0.9330 - 0.9450 ▼
- NZD/CAD: 0.8420 - 0.8550 ▲