NZD underperforms as cracks emerge in domestic outlook

Key Movers

The US dollar retreated through trade on Tuesday as markets looked to square positions following the Easter break and leading into a key US CPI inflation update. With the USD drifting downward the euro, GBP and CAD all enjoyed modest gains while the JPY tracked sideways. Having enjoyed a boost in the wake of another robust US labour market print the USD faltered following a survey of small business conditions that showed tougher lending conditions, a decline in confidence, a fall in capital spending expectations and a downturn in hiring expectations. The survey supports a slew of recent headline data events that suggest activity is pitching toward recessionary levels. With commentary from Fed policy makers now mixed the outlook for monetary policy remains clouded. New Fed member Goolsbee proffered a dovish soundbite overnight, suggesting recent banking sector instability is equivalent to 25-75 points of fed tightening, warning policy makers should be conscious of raising rates too aggressively in this environment. Goolsbee’s comments contrast with New York Fed President Williams who suggested that another rate hike in May was a good starting point, acknowledging the inflationary impact on household budgets still remains elevated with core price pressures largely unchanged. Our attentions turn now to tonight’s all-important CPI update. A correction in inflation in line with expectations could amplify calls for the Fed to consider pausing its tightening cycle while an upside surprise and signal price pressures have not yet peaked will give the Fed license to extend this rate hike cycle fueling near-term USD upside.