By Stuart Talman, XE currency strategist
Despite a second day of favourable softer US inflation data, negative risk sentiment continues to permeate markets, the three major U.S. equity indices extend lower whilst safe haven currencies, the yen and dollar, sit atop the G10 leaderboard as bond yields across the globe retreat. President Trump's sweeping tariff agenda remains the key driver of near-term direction as the tactic to use these as leverage in economic and geopolitical disputes creates heightened uncertainty and an environment whereby market participants shun risk-sensitive assets.
Following last week's eye watering sell-off that saw the dollar index (DXY) crunched by around three-and-a-half percent, its largest week-on-week loss since the height of the pandemic volatility in March 2020, DXY has halted its precipitous slide, range trading between the 103.20's and low 104.00's. The catalyst for last week's dollar pummelling, the surging euro has peaked a few pips shy of 1.0950 as euro bulls await further progress on the approval path for large German and eurozone infrastructure and defence spending proposals.
A little over a month ago EUR/USD was floundering below 1.0200 amidst louder calls for a fall through parity. Fading US exceptionalism and last week's eurozone fiscal developments the two factors driving a remarkable 7+% bounce over the past 5-weeks.
Firming earlier in the day, the New Zealand dollar was unable to extend yesterday's modest advance once again encountering resistance at 0.5740 as it did earlier in the week. Peaking in early afternoon Asian trade, the Kiwi slid close to 60-pips, marking intraday lows a couple of pips above 0.5660 as the U.S. session commenced.
The release of softer-than-expected PPI data catapulted the Kiwi back through 57 US cents, wholesale prices in the U.S. easing from an annualised headline rate of 3.7% in January to 3.2% (versus 3.3%, expected). The core measure fell from 3.6% to 3.4% with a sharp decline in trade margins a contributing factor. Whilst the CPI and PPI have both surprised to the downside, this week, expectations for the PCE (released later in the month), the Fed's preferred inflation measure are higher, projected to climb from 2.6% to 2.8%. The expected rise is attributed to firmer categories in both CPI and PPI that are used to calculate PCE. For example, goods prices advanced by 0.4% month-on-month, the largest gain in more than two years.
Inflation concerns have failed to subside amidst the escalating trade war.
Trump's latest tariff declaration, delivered early in the US session added to the market's consternation.
Posting on his Truth Social platform, Trump threatened to unleash a 200% tariff on wine, champagne and other alcohol products from France and other European Union members in response to the EU's plans to enact tax on American whiskey exports, a measure that was induced by the White House's steel and aluminium tariffs that went live, Wednesday. France's trade minister, Laurent Saint-Martin commented in an X post that France will not succumb to threats and will defend its industries.
Following Wednesday's soft-CPI induced gains, U.S. equities were offered immediately following the opening bell. With a few hours of trade remaining the S&P500, Nasdaq and Dow are all comfortably down over one percent. Entering correction territory, broadly defined as a greater than 10% pullback, S&P500 momentum indicators may offer some reprieve given current readings are categorically over-sold. Buy-the-dip players will hold onto hope that policy uncertainty will wane over the coming months enabling risk assets to rebound.
Should this thesis prove correct, equity market sensitive currencies such as the New Zealand and Australian dollars may benefit, outperforming against major peers.
To the day ahead, the global economic calendar presents Business NZ's Performance of Manufacturing Index (PMI), German consumer prices and the Michigan Consumer Sentiment Index. The focus for the latter will be on the inflation expectations component of the survey which the Fed intently monitors. The February edition reported 5-year inflation expectations rising from 3.2% to 3.5%, the highest on record, dating back to 1998. Rising inflation expectations are one factor that may compel the Fed to further delay rate cuts.
As for New Zealand dollar price action over the final session for the week, a close below 57 US cents adds further weight to the case that the NZD/USD rebound of the past few weeks has stalled. Conversely a strong close, close to 0.5750 raises hopes for NZD bulls for a successful test of the critical 0.5740/70 resistance zone, next week.
Stuart Talman is Director of Sales at XE. You can contact him here.
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