NZD climbs on improved risk tone
Friday 26 August, 2022
Daily Currency UpdateThe New Zealand dollar outperformed through trade on Monday, buoyed by an improvement in the risk narrative. The NZD extended back above US$0.62 despite a shockingly soft domestic retail sales print. Retail activity through Q2 fell 2.3%, a whopping 1.7% below market expectations and a clear indication the downturn in the housing market, coupled with lacklustre growth and the rising cost of living expenses, is starting to curtail consumer spending on larger discretionary items. The lacklustre print had little impact on the NZD as markets instead turned their attention to the People’s Bank of China (PBOC) and the daily fixing of the Chinese yuan. Policy makers surprised investors by setting a higher than anticipated daily fixing rate, a sure sign the recent rapid depreciation is creating some discomfort. The yuan bounced off two-year lows advancing 0.2% on the day, while a weaker USD helped the NZD extend its recovery and touched intraday highs at US$0.6252. We now turn our attention to Fed chair Jerome Powell as he proffers a monetary policy update.
Key MoversThe US dollar edged marginally lower through trade on Thursday, giving up 0.2% when measured against a basket of major counterparts following a general improvement in the underlying risk narrative. A correction in US treasury yields forced the dollar back below ¥137 against the yen while the euro poked its head above parity before settling lower leading into this morning’s open. Despite hawkish commentary from Federal Open Market Committee (FOMC) policy makers George, Bostic and Bullard, investors looked to close out short positions, reversing recent gains and squaring positions ahead of Jerome Powell’s commentary this evening.
The euro advanced following the release of the European Central Bank (ECB) meeting minutes, revealing that a broader European recession won’t prevent policy makers from lifting rates to control inflation. Given the drivers behind the surge in price pressures, namely elevated gas prices, there is a concern a recession won’t naturally force a downturn in inflation. The central banks must continue tightening financial conditions to avoid price increases entrenched within the euro economy. The market is now pricing a 100-basis point of hikes through the next two policy meetings, including a possible 75-point hike next month. Next week’s CPI inflation report will be crucial in guiding near-term policy expectations. The upswing in rate expectations will likely add little support to the embattled single currency as markets look beyond near-term yields to the longer economic outlook.
We turn our attention today to the Jackson Hole Symposium on monetary policy and commentary from Fed Chair Jerome Powell.
- NZD/USD: 0.6150 - 0.6280 ▲
- NZD/EUR: 0.6180 - 0.6280 ▲
- GBP/NZD: 1.8880 - 1.9120 ▼
- NZD/AUD: 0.8880 - 0.8980 ▼
- NZD/CAD: 0.8000 - 0.8100 ▲