Volatility abound; NZD crashes to fresh low before strong rebound
Friday 14 October, 2022
Daily Currency UpdateWild price action dominated currency markets through trade on Thursday, following stronger than anticipated US inflation and rising speculation the UK will be forced to walk back proposed changes to taxes. Speculation Chancellor Kwarteng and new Prime Minister Truss will be forced to u-turn tax cuts proposed in last month’s mini budget intensified on Thursday, as senior government officials continue to refuse to endorse plans. The promise of a smaller program of fiscal easing coupled with a ramp up in BoE gilt buying helped alleviate market fears, and while UK rates fell the GBP surged higher, forcing the NZD to give up £0.50 plunging to intraday lows at £0.4935 before finding support.
While the spotlight remains on UK financial stability, US inflation dominated the macro ticket overnight. A hotter than anticipated print prompted an immediate surge in Fed rate hike expectations, driving the NZD toward fresh lows below $0.5525. Both headline and core inflation outpaced median estimates last month, with the latter surging to a 40-year high. With no signs of a downturn in inflation pressures, markets rushed to price in a 75-basis point fed rate hike, while the likelihood of an outsized 100-point jumbo hike intensifies. Risk sentiment plunged, driving a sharp correction across equities and currency markets. Having touched intraday lows at $0.5516, the NZD rebounded strongly as risk sentiment turned positive leading into the daily close. There appears no obvious catalyst for the rebound in risk appetite and appears simply a broader re-positioning after a significant risk sell-off.
Our attentions remain affixed to the UK as the Bank of England ends its emergency backstop program. We expect volatility will continue into the weekly close.
Key MoversThe Great British pound outperformed major counterparts through trade on Thursday, despite a sharp correction in UK rates. Reports Chancellor Kwarteng and new PM Liz Truss will be forced to walk back proposed changes to taxation policy intensified, with key senior officials refusing to endorse plans. Speculation the government will have no choice but to perform an abrupt u-turn has helped alleviate immediate fears surrounding the health of the gilt market and broader UK financial system. The promise of reduced fiscal stimulus has eased pressure on Bank of England rate expectations, with peak policy rates now priced at 5.55% for June next year. While UK rates fell, the GBP rallied off intraday low at 1.1050 toward session highs above 1.1350. The aggressive uptick shows just how much negativity was priced into the GBP.
The USD surged against the Japanese yen, punching through 147 and marked a 42-year high at 147.67, before a sharp and immediate spike back toward 146.50. The sudden nature of the reversal suggests Ministry of Finance intervention and while the dollar edged back toward 147, we expect near term gains will be limited.
In other news, the euro staved off a post CPI downturn, enjoying the risk on run into the daily close, moving through 0.9750 to mark session highs at 0.98.
Our attentions remain affixed to the UK as the Bank of England ends its emergency backstop program, while US consumer sentiment and retail sales data dominate the macroeconomic ticket. We expect volatility will continue into the weekly close.
- NZD/USD: 0.5520 - 0.5660 ▲
- NZD/EUR: 0.5720 - 0.5820 ▼
- GBP/NZD: 1.9750 - 2.0350 ▲
- NZD/AUD: 0.8920 - 0.8980 ▲
- NZD/CAD: 0.7700 - 0.7800 ▼