FX Daily: USD on Fed watch, GBP weighed by inflation, NZD by RBNZ pause

GBP eyeing lower 1.2290 level, NZD weak post-RBNZ
Group Research, Philip Wee25 May 2023
    Photo credit: Unsplash Photo

    DXY appreciated a second day by 0.4% to 103.9, its highest close since 18 March. The US Treasury 2Y yield is testing 4.40% again after correcting to 4.24% (100-day moving average). Per the FOMC minutes for the 2-3 meeting, the Fed is open to a pause in June and will rely on data to decide if more hikes will be needed to return inflation to the 2% target. This was reflected by the Fed Funds Futures not ruling out a hike in July or September. Tomorrow, consensus expects the US PCE deflator to rise to 0.3% MoM in April from 0.1% in March, in line with the increase in CPI inflation to 0.4% from 0.1% earlier this month. Next Friday, consensus is again looking for nonfarm payrolls to slip below 200k to 175k in April. NFP fell to 236k in March from 311k in February. However, volatility will also increase as the X-date on 1 June (a week from today) to lift the US debt ceiling approaches. Let’s see if Fitch’s warning of a downgrade in US’s debt rating helps break the impasse.

    GBP depreciated 0.4% to 1.2364, its weakest close since 31 March. GBP did not draw support from a spike in the 2Y Gilt yield by 24 bps to 4.37%, back to levels when the UK lost credibility on the mini-budget crisis. Although UK’s CPI inflation fell to 8.7% YoY in April from 10.1% in March, it fell short of the 8.2% consensus and the Bank of England’s 8.4% forecast. Worse, core inflation was not flat at 6.2% and jumped to 6.8%. Although the IMF agreed that the UK economy would avert a recession, the market believes that the Bank of England needs to keep hiking into summer. Prime Minister Rishi Sunak is under pressure for tax cuts ahead of the elections, where the opposition Labour Party is leading the polls. Unfortunately, inflation has already boosted interest payments and ballooned public sector net borrowing to GBP48.4bn in the first four months vs GBP9.9bn in the same period a year ago. In closing below its 50-day MA, the door for GBP to decline to 1.2290 or its 100-day MA is open. However, some profit-taking could emerge at 1.2320, the intra-day low seen on 10 April, after two weeks of declines.

    NZD plunged almost 2.2% to 0.6112, dragging AUD down by 1% to 0.6544. The Reserve Bank of New Zealand signalled that yesterday’s 25 bps hike to 5.5% was the last of the hiking cycle. The central bank left its peak rate forecast at the same 5.5% projected in February. The NZ 2Y bond yield eased 29 bps to 4.81% after rising to 5.1% on Tuesday from 4.56% at the end of April. Consensus sees RBNZ cutting rates later this year as real GDP contracts from 2Q23 to 4Q23.  Apart from the government’s significantly wider fiscal deficit announced before the October general elections, NZ’s debt rating is also at risk from persistently large current account deficits. NZD will likely test the 0.60 level once it succeeds in taking out the year’s low at 0.6085 (on 8 March).

    Quote of the day
    “Interest rates are well above what we would consider neutral, are constraining spending and investment.”
         RBNZ Governor Adrian Orr on 24 May 2023

    25 May in history
    George Lucas’ Star Wars movie premiered in 1977, Ridley Scott’s Alien in 1979.



    Philip Wee

    Senior FX Strategist - G3 & Asia

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