Equities flat, yields up, crude down, gold up, US dollar down

By Stuart Talman, XE currency strategist

The New Zealand and Australian dollars continue to outperform, buoyed by higher commodity prices, as heightened geopolitical concerns, stubbornly high inflation and supply issues drive prices and therefore commodity linked currencies higher. 

Gold is trading at all-time highs, copper, silver and zinc have all risen over 10% during the past month whilst WTI and Brent crude have ascended to 6 months highs as tensions between Iran and Israel ratchet higher. And in a blow to chocolate lovers, the price of Cocoa has doubled in just two months due to concerns regarding shrinking global cocoa supplies.

Notably though, the price of iron ore and dairy, the two largest exports for Australian and New Zealand, respectively have failed to follow the broader commodity complex higher.

Iron ore is down circa 15% over the past month, due largely to China’s steel mills cutting output.

Despite the 2.8% rebound at last week’s Global Dairy Trade auction, dairy prices have softened in three of the past four auctions, driving whole milk powder prices some 6% lower from February’s peak.

Clearly, China’s struggling economy is impacting demand for the antipodeans’ major exports. 

Therefore, one must question how sustainable this commodity linked AUD and NZD outperformance will last given China’s woes will continue and the Fed appears more and more unwilling to commence lowering the target rate at the 12 June FOMC meeting.

Fed funds futures currently assign a near 50/50 split to a 25 bps cut vs an on-hold decision for June.

Tomorrow’s US CPI report may be pivotal in tipping the odds in a more decisive direction. Annualised headline CPI is projected to have risen from 3.2% to 3.4% whilst the consensus forecasts core to ease from 3.8% to 3.7%. Upside surprises would all but extinguish hopes for a June cut, although there is one more CPI report, released 15 May, to be digested in the run up to the June FOMC.

Commencing the new week a few pips above 60 US cents, the New Zealand dollar climbed around a third-of-a-percent through Monday’s sessions, topping out in the 0.6030’s.

Over the past few weeks a 0.6030/50 resistance zone has materialised, capping the pairs upside whilst on the downside, 0.5980 was confirmed as an important swing low, late last week.

Below here, the critical support level to monitor is 0.5940 which halted the NZD/USD circa 4.5% slide from the 08 March high near 0.6220. A hot CPI report would surely open a path for the Kiwi to retest 0.5940 whilst at the other end of potential outcomes, softer-than-expected inflation likely drives the pair back into the 0.6050 – 0.6220 range that evolved from mid-January.

Looking to the day ahead, it may prove to be uneventful given the absence of tier 1 data releases and as markets slip into wait-and-see mode ahead of Wednesday’s US CPI data which locally, drops just after midnight.

Expectations are for the Kiwi to trade in the mid to low 0.60’s through Tuesday and most of Wednesday as the RBNZ on-hold decision (tomorrow) and accompanying statement could pass with little directional impact.


Stuart Talman is Director of Sales at XE. You can contact him here


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