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NZD/USD fades US inflation-driven advances beneath 0.64 prior to China trade data
NZD/USD drops from a one-month high despite the fact that market mood remains buoyant. Even as Fed policymakers attempted to justify restrictive monetary policy, softer US inflation fueled calls for slower rate hikes. Expectations of an easy RBNZ move appear to weigh on the Kiwi pair despite a light domestic schedule. China trade figures for December and early US Michigan CSI readings for January are anticipated to provide a fresh impetus.
During a sluggish Asian session on Friday morning, the NZD/USD trades in a range of 0.6390 to 0.6385 as it consolidates the US inflation-driven gains. In doing so, the Kiwi pair also reflects traders' apprehension ahead of China's December trade data and the initial January readings of the US Michigan Consumer Sentiment Index (CSI).
Notably, the weaker US Consumer Price Index (CPI) for December fueled expectations of easy rate hikes and weakened the US Dollar the day before. However, recent rumors that the Fed's easy approach could potentially prompt the Reserve Bank of New Zealand (RBNZ) to abandon its hawkish stance appeared to weigh on the NZD/USD exchange rate.
However, the US CPI met predictions of 6.5% YoY for December, compared to 7.1% previously. Moreover, CPI excluding food and energy confirmed the market consensus of 5.7% YoY, compared to previous readings of 6.0%. Notable is the fact that the CPI MoM marked its first negative result since June 2020 with a -0.1% figure for the specified month, compared to the 0.0% anticipated and 0.1% prior figure.
Fed Fund Futures connected to the policy rate implied a nearly 100 percent possibility of a 0.25% Fed rate hike in February, but the odds favoring a 50 bps rate hike in the same month dropped to 8.0%.
Notably, Federal Reserve Bank of Philadelphia President Patrick Harker was the first to signal moderate rate hikes after the US CPI, which weighed on the US Dollar. Thomas Barkin, president of the Federal Reserve Bank of Richmond, stated in the same vein that it "makes sense" for the Fed to steer more cautiously in its efforts to reduce inflation. However, St. Louis Federal Reserve chairman James Bullard also noted that the most likely scenario is inflation lasting above 2%, therefore the policy rate will need to be higher for longer.
Amid these maneuvers, Wall Street managed to close in the green while the US 10-year and two-year Treasury bond yields hit monthly lows. Notable is that S&P 500 Futures post modest increases while US 10-year Treasury rates remain under pressure around 3.44 percent.
Given the absence of significant domestic data/events, NZD/USD may remain subdued until China and the United States report their most important numbers. Should the forecasted data be able to impress policy hawks in Beijing and Washington, the New Zealand dollar could prolong its recent decline.
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