Last week's Fed meeting provoked an increase in demand for the US dollar and a correction in stock indices, as the updated forecasts now suggest an earlier rate hike. However, a pullback occurred yesterday in most indicators – stock indices resumed their growth, government bond yields increased, oil and most commodities also further rose. Most likely, the reason is the relatively soft comments of the Fed members, who did not develop a hawkish focus of their decision, but, on the contrary, give very cautious comments.
But one thing is clear – a rate hike is not an end for Fed officials, and the ECB is clearly not in a rush to go on a hawkish direction. It is possible there will be a little more clarity today, as the Fed Chairman, J. Powell will make a speech in Congress. For now, it should be assumed that the reasons for the US dollar's strengthening look unconvincing.
The New Zealand dollar declined in line with expectations. Its dynamics do not stand out in any way relative to the dynamics of other G10 currencies, but external stability hides quite rapid processes that have their own specifics.
Let's start with the fact that the increased volatility that arose after the FOMC meeting last week has a source of revision of the Fed's rate forecasts. It is expected that the rate will be raised twice in 2023, which has served to revise forecasts for the dollar and its growth in recent days. At the same time, most other central banks remain cautious and are in no hurry to improve their forecasts. Most of the themes of New Zealand's economic recovery are such that the RBNZ rate may begin to rise long before the Fed.
GDP growth in the 2nd quarter was 1.6% q/q, which is much higher than the May forecast of the RBNZ (-0.6%). The second quarter will be significantly stronger due to the low base, but New Zealand is only second to China among its traditional partners in terms of GDP growth.
All the growth is due to the growth of the domestic economy since restrictions on the influx of tourists remain. This means a very strong growth in domestic demand and as a result, an increase in inflation expectations. The RBNZ has every reason to raise its inflation forecasts.
ANZ Bank forecasts the first rate hike in February next year, but if the labor market or GDP growth does not show the expected pace of recovery, the increase can be postponed to the autumn. In any case, the first increase should happen obviously before the Fed does, and as soon as the market fully realizes this, the NZD/USD rate will turn up. Perhaps, this will happen in July after the publication of the first preliminary estimate of GDP for Q2.
Without the CFTC data, the price is still below the long-term average, but the momentum has weakened sharply. We may be near the bottom point.
The most likely scenario is that the test of the low of 0.6917 will take place, but it will be unsuccessful. A base will form near this level and the NZD/USD pair will turn up. However, it is too early to buy as long as the estimated price is below the long-term average. Trading is likely to go in a sideways range.
Brent futures successfully tested the level of $ 75 per barrel. The prices for the main raw materials, such as metals, resume growth after a short correction, which should lead to the growth of the Australian dollar, but there are a number of factors that will restrain its growth.
There is a lack of foreign capital inflows in Australia, as the advantage of high rates is negated. In addition, the outflow of capital contributed to the growth of political tensions between Australia and China.
Due to the lack of the CFTC report, the estimated price gives a bearish outlook. There are also only a few grounds to continue growth.
There is still a high probability of another wave of decline. The nearest support is 0.7410/20, which is a 23.6% correction from last year's upward wave and a simultaneous local high from August 2020.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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