TSX up after index logs fresh record high close
NZD/USD is pressing into a major resistance zone with the Fed outlook, US payrolls revisions and CPI all looming large. With Treasury yields sliding and rate cut bets mounting, the next few days may set the tone for the Kiwi’s next big move.
- NZD/USD testing major resistance.
- U.S. payrolls revisions and CPI key risks.
- Services inflation in focus for Fed.
- Bias sideways to higher near term.
NZD/USD Outlook Summary
NZD/USD sits at an important juncture, testing a major resistance zone consisting of the 50-day moving average and July 1 downtrend. With the U.S. interest rate outlook in the driving seat, key U.S. economic data looms large that could easily determine how the Federal Reserve proceeds in the months ahead.
Throw in another round of hefty Treasury issuance from the U.S. government and a potential major revision to U.S. payrolls growth in the year to March, and the coming days could deliver a major turning point for the Kiwi dollar.
Fed Rate Cut Bets Up, Kiwi Up
Mounting rate cut bets continue to weigh on the US dollar, sending yields further out the Treasury curve sharply lower, eroding the appeal of U.S. debt even before Fed independence and the US fiscal outlook are taken into consideration. The impact has been stark, with currencies that were previously under extreme pressure from relentless greenback strength popping higher as capital flows shifted to other parts of the world.
Source: TradingView
The Kiwi dollar has been among the chief beneficiaries, demonstrating an increasingly strong inverse correlation with both short and longer-dated US Treasury yields over the past fortnight. As Fed rate cut bets have surged, so too has NZD/USD—as shown in the left-hand pane of the chart above, tracking the Kiwi against the amount of easing priced between now and June next year, according to futures markets.
It’s hard to see that influence changing in the near term, meaning how U.S. interest rate pricing evolves will likely determine whether the Kiwi sinks or swims.
Repeat of September 2024?
While labour market data is the chief focus for most Fed officials and traders right now—the last two payrolls reports have delivered the largest volatility events by far over the past five weeks—there is still plenty of fresh information this week that could determine whether the Fed cuts by 25 basis points, 50, or leaves policy on hold at the September FOMC meeting.
When assessing the skew of potential outcomes, the risk of the Fed resuming its easing cycle with a supersized 50-point rate cut next week looks underpriced. Policy rates remain in restrictive territory by more than an estimated 100 basis points, there are already over 150 basis points of cuts priced by the end of next year, and the labour market is showing evidence of slowing, risking a potential acceleration in unemployment. But the Fed needs a catalyst to go big quickly.
Source: TradingView
Tuesday’s payrolls revision—while dated given it impacts estimated hiring in the year to March this year—is one potential catalyst, especially if we see an outcome mirroring or larger than the 818,000 downward revision in the prior 12-month period. That undoubtedly contributed to the Fed delivering a 50-point cut at its September FOMC meeting last year.
The other release that could shift the dial is Thursday’s consumer price inflation (CPI) report. However, rather than focusing on goods prices, traders would be far better off zeroing in on the services measure for two reasons.
Firstly, services categories carry far greater weighting in the U.S. inflation basket and are more reflective of domestic economic conditions. Unusually, they’ve been accelerating on an annual basis over recent months, countering the signal from deteriorating jobs data. Secondly, the reacceleration has been cited by several FOMC officials recently as a reason to be cautious when it comes to lowering rates.
If the strength in services inflation persists in August, it will make it difficult to justify anything larger than a 25 basis point cut, especially as it could add to concerns about the potential for goods inflation to lift on the combination of firmer demand and tariff-related cost increases. But if services inflation were to cool suddenly, the signal that would send on domestic demand and, as a consequence, the outlook for goods prices, may just be enough to push the Fed to bring forward the pace of easing, opening the door for a 50.
To be sure, a 25-point move remains highly favoured. But it’s far more likely that if there were to be a deviation from the Fed, it would be towards a more dovish outcome rather than something hawkish.
Given the links between the U.S. rates outlook and the Kiwi, that suggests directional risks for NZD/USD may be sideways to higher in the near term.
NZD/USD Bullish Breakout Risk Grows
Source: TradingView
NZD/USD continued to attract buyers at the 200-day moving average prior to Friday’s U.S. payrolls report, contributing to the bullish engulfing candle that printed on the day. The bullish signal proved to be reliable with the pair continuing to push higher on Monday, taking out horizontal resistance at .5910 before stalling at the confluence of the 50-day moving average and July 1 downtrend.
While it comes across as going against the prevailing grain with the 50-day moving average still sloping lower and the 200 equivalent flatlining, momentum indicators are showing early signs of turning higher, hinting the latest breakout attempt may succeed where others have failed.
RSI (14) is trending higher and now above 50, signalling building bullish momentum without being overbought. And while not yet confirmed by MACD which remains in negative territory, it has already crossed the signal line from below and is also trending higher. The message is not a ringing endorsement to pin the ears back and buy, but at the very least it hints the bears are losing control.
If NZD/USD can break and close above the resistance zone, it would create a setup where longs could be established with a stop beneath for protection, targeting .6000 initially with .6050 and .6110 other options after that.