Powell’s expected speech turned out to be uninformative. Overview of USD, NZD, AUD
February 8, 2023 11:22 pm
The main event of Tuesday, and maybe the entire week, was the interview of Federal Reserve Chairman Jerome Powell. As soon as he started talking, the markets began to rush, which is a sign of high uncertainty. At the beginning of the interview, Powell’s voice was dovish, which caused stocks to jump and UST yields to decline. However, Powell’s closing remarks were more hawkish, noting that if the strong labor data continues, the peak speed in the current tightening cycle could be higher. In general, it should be noted that Powell’s comments provided little new information, he did not go into depth on the subject of a strong labor market, as observers expected.
US stock indices immediately went up, the US dollar rolled back down. So far, the situation looks like that the over-optimistic non-farms have been won back, as well as the increase in the forecast for the Fed rate, and now it’s up to real statistical data that will show which scenario will develop. Three voting members of the FOMC (Williams, Kashkari, Waller) plus non-voting Atlanta Fed Bostick are scheduled to speak today, likely to expand on what Powell said yesterday, so volatility could rise as the US session opens.
The next strong driver will not come until next week, on Tuesday the US inflation report for January will be released. The strong rise in yields of 5-year Tips bonds, showing the inflation forecast for the next 5 years on average, suggests that the decline in inflation can be slowed down, this is also a factor in favor of a stronger dollar.
Until the end of the week, we expect trading to be generally calm.
NZDUSD
New Zealand’s economy, which until recently seemed to be an example of resilience, is experiencing more and more difficulties. 4Q labor market data was weaker than forecasts (including RBNZ forecasts), labor demand outlooks have declined significantly in recent months, and unemployment is now forecast to continue rising slightly in the first half of 2023 and then pick up faster in the second half of the year as the sharp rise in interest rates causes the economy to contract. Unemployment is expected to rise to a peak of 5.4% in 2024 from 3.4% currently.
There was a reassessment of forecasts for the RBNZ rate. If a couple of weeks ago the Fed’s peak rate was considered at 5%, and the RBNZ rate was 5.75%, now the situation has changed. The peak for the Fed rate is at about 5.15%, and for the RBNZ rate – at the level of 5.2%, that is, the expected yield spread has disappeared, and the kiwi, respectively, has lost the main driver that supported the growth of the kiwi since October.
In the absence of CFTC data, the settlement price turned slightly lower, which also indicates a weakening of the NZD bullish momentum.
The likelihood that NZDUSD can return to a high of 0.6532 is getting smaller. The most likely scenario at the moment is a small pullback up from the low at 0.6263 and the transition of trading into a sideways range with an upper border of 0.6532 in anticipation of new data. The first quarter of this year will provide a lot of new information, primarily regarding the depth of the expected recession, the reaction of both the RBNZ and the Fed is unlikely to be aggressive, so we regard the likelihood of a new strong driver that can form a strong trend as low.
AUDUSD
The RBA raised the rate by 25p to 3.35%, the ninth consecutive increase. The accompanying statement was also hawkish, as the RBA expects “…more interest rate hikes will be required in the coming months…”. The “plural” in this wording suggests that the RBA expects at least two more 25bp rate hikes. in the coming months, most likely in March, and then possibly another in April or May. The key data to look out for ahead of the next RBA meeting are wages based on the February 22 Wage Index and National Accounts data on March 1.
The aussie has recovered part of the fall after Friday’s non-farms, mainly due to the hawkish position of the RBA. A quick positive inflation is not expected, the forecast is that inflation will be able to drop to 4.75% this year and to 3% by mid-2025, that is, it will remain above the target for a long time. Accordingly, the position of the RBA is unlikely to change much in the coming months.
If the recession in the US really turns out to be shallow, then the collapse in commodity prices will not come, which means that export-oriented countries will receive an additional growth factor. As long as financial flows indicate that demand for the AUD continues to grow, the settlement price is directed upwards, the Aussie has reason to resume growth.
I expect the resistance zone at 0.7140/60 to be tested again, technically, the trend is still bullish. We don’t know whether the aussie will be able to go higher. The recent low at 0.6856 will act as support, there is no reason for deeper decline. Bullish momentum on the AUDNZD cross persists.
The material has been provided by InstaForex Company – www.instaforex.com
The main event of Tuesday, and maybe the entire week, was the interview of Federal Reserve Chairman Jerome Powell. As soon as he started talking, the markets began to rush, which is a sign of high uncertainty. At the beginning of the interview, Powell’s voice was dovish, which caused stocks to jump and UST yields to decline. However, Powell’s closing remarks were more hawkish, noting that if the strong labor data continues, the peak speed in the current tightening cycle could be higher. In general, it should be noted that Powell’s comments provided little new information, he did not go into depth on the subject of a strong labor market, as observers expected.
US stock indices immediately went up, the US dollar rolled back down. So far, the situation looks like that the over-optimistic non-farms have been won back, as well as the increase in the forecast for the Fed rate, and now it’s up to real statistical data that will show which scenario will develop. Three voting members of the FOMC (Williams, Kashkari, Waller) plus non-voting Atlanta Fed Bostick are scheduled to speak today, likely to expand on what Powell said yesterday, so volatility could rise as the US session opens.
The next strong driver will not come until next week, on Tuesday the US inflation report for January will be released. The strong rise in yields of 5-year Tips bonds, showing the inflation forecast for the next 5 years on average, suggests that the decline in inflation can be slowed down, this is also a factor in favor of a stronger dollar.
Until the end of the week, we expect trading to be generally calm.
NZDUSD
New Zealand’s economy, which until recently seemed to be an example of resilience, is experiencing more and more difficulties. 4Q labor market data was weaker than forecasts (including RBNZ forecasts), labor demand outlooks have declined significantly in recent months, and unemployment is now forecast to continue rising slightly in the first half of 2023 and then pick up faster in the second half of the year as the sharp rise in interest rates causes the economy to contract. Unemployment is expected to rise to a peak of 5.4% in 2024 from 3.4% currently.
There was a reassessment of forecasts for the RBNZ rate. If a couple of weeks ago the Fed’s peak rate was considered at 5%, and the RBNZ rate was 5.75%, now the situation has changed. The peak for the Fed rate is at about 5.15%, and for the RBNZ rate – at the level of 5.2%, that is, the expected yield spread has disappeared, and the kiwi, respectively, has lost the main driver that supported the growth of the kiwi since October.
In the absence of CFTC data, the settlement price turned slightly lower, which also indicates a weakening of the NZD bullish momentum.
The likelihood that NZDUSD can return to a high of 0.6532 is getting smaller. The most likely scenario at the moment is a small pullback up from the low at 0.6263 and the transition of trading into a sideways range with an upper border of 0.6532 in anticipation of new data. The first quarter of this year will provide a lot of new information, primarily regarding the depth of the expected recession, the reaction of both the RBNZ and the Fed is unlikely to be aggressive, so we regard the likelihood of a new strong driver that can form a strong trend as low.
AUDUSD
The RBA raised the rate by 25p to 3.35%, the ninth consecutive increase. The accompanying statement was also hawkish, as the RBA expects “…more interest rate hikes will be required in the coming months…”. The “plural” in this wording suggests that the RBA expects at least two more 25bp rate hikes. in the coming months, most likely in March, and then possibly another in April or May. The key data to look out for ahead of the next RBA meeting are wages based on the February 22 Wage Index and National Accounts data on March 1.
The aussie has recovered part of the fall after Friday’s non-farms, mainly due to the hawkish position of the RBA. A quick positive inflation is not expected, the forecast is that inflation will be able to drop to 4.75% this year and to 3% by mid-2025, that is, it will remain above the target for a long time. Accordingly, the position of the RBA is unlikely to change much in the coming months.
If the recession in the US really turns out to be shallow, then the collapse in commodity prices will not come, which means that export-oriented countries will receive an additional growth factor. As long as financial flows indicate that demand for the AUD continues to grow, the settlement price is directed upwards, the Aussie has reason to resume growth.
I expect the resistance zone at 0.7140/60 to be tested again, technically, the trend is still bullish. We don’t know whether the aussie will be able to go higher. The recent low at 0.6856 will act as support, there is no reason for deeper decline. Bullish momentum on the AUDNZD cross persists.
The material has been provided by InstaForex Company – www.instaforex.com
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