NZD upswing stalls as markets take stock
Daily Currency UpdateThe New Zealand dollar failed to extend last week’s upswing, edging lower and giving up US$0.61 in what was a relatively quiet start to the week. Investors appeared reluctant in extending gains won in the aftermath of last week's US CPI downside miss, paring gains amid commentary from key Fed officials. While acknowledging inflation was finally trending in the right direction, policy makers were at pains to emphasise further tightening was necessary. The market appears to have gotten way out in front of the Fed in adjusting expectations for monetary policy. While we expect the Fed will move to a slower pace of rate hikes, talk of a 25 point adjustment in December is perhaps too soon and we anticipate the Fed will adopt a gradual approach in tempering the pace of interest rate adjustments. Having tested a break above US$0.61, the NZD tracked between US$0.60 and US$0.61 through trade on Monday. The question now, can we maintain this break higher? Momentum is swinging away from the USD and there are now clear signals suggesting the world’s base currency may have peaked. A sustained slowdown in US labour market performance, easing inflation pressures, and a broader Chinese economic re-opening could help the NZD extend gains and enjoy a break toward US$0.62-0.65, while a breakdown in the newly formed narrative will likely force a correction back below US$0.60 cents.
Our attentions turn now to domestic housing data, while Chinese activity data, US PPI and commentary from key Fed officials dominate the daily ticket. We are keenly focused on US PPI data and any possible signal that supports last week's CPI downturn.
Key MoversAfter last week's outsized price action and post CPI surge, markets adopted a calmer approach through trade on Monday, minimising price swings while affording the USD an opportunity to pare back recent losses. The dollar recovered some lost ground with the DXY index up half a percent, driven by corrections in the GBP and JPY. The pound and yen were two of the biggest winners last week, surging in the wake of the US CPI downside miss. Markets however appeared reluctant in extending gains as commentary from key Fed officials sought to temper volatility, emphasising the scale of work still ahead of the FOMC. While inflation has turned lower it is still significantly above the Fed’s 2% target, forcing policy makers to maintain an aggressive monetary policy platform into 2023. Sterling lost over half a percent on the day, while the yen allowed the USD to power back through 140.
In other news, the Chinese yuan advanced against the USD as investors respond to signs China is moving toward a more accommodating COVID policy. Restrictions and lockdowns on new outbreaks have not been as harsh as those imposed on Shanghai earlier this year, while a loosening in quarantine controls and reports the government will step in to defend the ailing property market help further bolster demand for the yuan.
Our attentions turn now to Chinese activity data, US PPI and commentary from key Fed officials. We are keenly focused on US PPI data and any possible signal that supports last week’s CPI downturn.
- NZD/USD: 0.6020 - 0.6150 ▲
- NZD/EUR: 0.5850 - 0.5950 ▲
- GBP/NZD: 1.9180 - 1.9420 ▼
- NZD/AUD: 0.9050 - 0.9150 ▲
- NZD/CAD: 0.8050 - 0.8150 ▲