FX Update: Kiwi at maximum potential after super-sized RBNZ hike? FX Update: Kiwi at maximum potential after super-sized RBNZ hike? FX Update: Kiwi at maximum potential after super-sized RBNZ hike?

FX Update: Kiwi at maximum potential after super-sized RBNZ hike?

Forex
Picture of John Hardy
John J. Hardy

Chief Macro Strategist

Summary:  The US dollar is mixed ahead of a raft of second-tier data points later today and the FOMC minutes tonight, with focus on the scale of disagreement among Fed members on the tightening path from here. A long Thanksgiving weekend is set to follow. Elsewhere, the kiwi has found another leg up on the RBNZ hiking by 75 basis points, the most ever, overnight, while sterling dodged a bullet as the UK Supreme Court ruled against Scottish independence referendum proceeding.


FX Trading focus: RBNZ surprises (some) with 75 basis point hike. USD scratching around for direction.

The market was about evenly split on whether the RBNZ would rock the boat with a largest.-ever rate hike overnight, which is what it delivered, taking the rate +75 bps to 4.25% and guiding rather hawkish, which helped to rise the peak rate expectation into next spring some 30 basis points toward 5.50%. This drove a bit more NZD strength, but as the currency has been on such a strong run lately, the shock value was minimal in market pricing. I suspect that while there may be a bit more to wring out of the situation here, we are very likely at peak hawkishness from the RBNZ in relative terms to other central banks. The RBNZ was one of the first G10 central banks to cease and desist with QE and begin hiking rates and the impact on NZ economic growth will mount aggressively in coming months. AUDNZD, for example, has also been helped lower not just by RBNZ hawkishness, but by the Aussie’s greater sensitive to the frustration over China’s now-you-see-it, now-you-don’t reopening process.

The US dollar continues to scratch around for direction, dipping yesterday on the ideal combination for USD bears, falling long US Treasury yields and strong risk sentiment. As discussed in my Monday update, the heavy hitting data doesn’t arrive until next week with the Friday jobs and earnings data the chief focus, followed by December 13 November US CPI release.  These CPI releases have the market tied in knots – it is beginning to look a bit one-dimensional, and the market may need to broaden its focus on the implications of an incoming recession soon, but more incoming data needed to point that recession is perhaps necessary first. I don’t have my hopes up for any revelations from tonight’s FOMC Minutes release, although interesting to see if there are obvious signs of disagreement on how to guide for the slowdown in tightening, as well as whether “a few”, “some”, or even “several” Fed members make a fuss about financial conditions easing aggressively. As most of that easing has taken place after the FOMC meeting itself, it is doubtful.

Chart: GBPUSD
Since the epic USD slide on the November 10 release of the softer-than-expected US October CPI data, the US dollar has done very little, while sterling has generally edged higher versus its most important peers on a further thaw in negative sentiment, even if the longer term outlook for the UK has been made that much more bleak by the latest budget announcement. Sterling and the US dollar will remain sensitive to new significant shifts in sentiment and in opposite directions. If we continue to see a melt-up inspired by mounting certainty that the Fed isn’t about to surprise the market any time soon and incoming data allows the market to indulge in soft-landing hopes for now (insufficiently strong data to raise inflation fears), GBPUSD may be able to drift back to 1.2000 and possibly even to the 200-day moving average above 1.2200 or even the major pivot highs into 1.2250+ from early August (!). On the flip-side, oncoming recession concerns are likely to only rise from here, which in past market cycles will eventually lead to a deterioration in financial conditions (currently close to the easiest they have been since the before the Fed started hiking in 75 basis point increments back in June) and weaker risk sentiment. The weather could also turn colder and remind investors of Europe’s energy predicament, a constant concern in the background. But it will take a lot of cable selling to suggest weakness – effectively, we would need to take out most of the move down to 1.1500 to reverse the November 10 move in USD weakness.

23_11_2022_JJH_Update_01
Source: Saxo Group

Sterling has enjoyed the risk-on backdrop, with GBPUSD probing well above 1.1900 this morning, with an added modest boost on the preliminary UK November PMI’s looking relatively benign (Services unchanged at 48.8 vs.  the story breaking that the UK Supreme Court ruled against a new Scottish independence referendum proceeding until the UK government had given permission for one to be held. I have been surprised at sterling’s strength even beyond the initial reset of the situation provided by the removal of Truss-Kwarteng and supposedly soothing stability on offer from Sunak-Hunt. Perhaps positioning is the key – the last short sterling holdouts haven’t been entirely flushed and the those that have already been flushed (or took profits) are in no rush to get involved just yet. It will likely take some time and a catalyst for a fresh weak sterling cycle to develop down the road.

Table: FX Board of G10 and CNH trend evolution and strength.
After this RBNZ meeting overnight, have to wonder if kiwi is soon or already has reached its peak potential. Elsewhere, interesting to note the CNH relative weakness against the market, tracking USD direction as it so often does after the brief period of underperformance about a month ago.

23_11_2022_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Not hanging my hat on any new developments here. AUDNZD has achieved a remarkable -6.1 reading in its negative trend strength reading.

23_11_2022_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1330 – US Oct. Preliminary Durable Goods Orders
  • 1330 – US Weekly Initial Jobless Claims
  • 1445 – US Nov. Preliminary Manufacturing and Services PMI
  • 1500 – US Nov. Final University of Michigan Sentiment
  • 1500 – US Oct. New Home Sales
  • 1905 – US FOMC Meeting Minutes
  • 1905 – New Zealand RBNZ Governor at Parliament committee
  • 2130 – Canada Bank of Canada Governor Macklem to testify to parliament committee

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.