Business activity in most countries continues to slow, with European PMI indices generally lower than December levels. Activity in the US services sector also declined markedly. On Monday, demand for risk sharply fell, although there are few objective reasons for such sudden movements.
One of the possible reasons is the growth of geopolitical tensions around Ukraine. This reason is quite far-fetched since the markets behave calmly until the results of the FOMC meeting that has begun are announced. We assume that the volatility will decrease on Tuesday, but the demand for protective assets will still dominate.
NZD/USD
The New Zealand dollar has updated the local low, falling to the lower border of the bearish channel. However, there is a possibility that the downward movement is ending.
ANZ Bank has updated the rate forecast by 100 points at once and expects that the RBNZ will raise the rate at each of the next 9 meetings until it pulls it up to 3% by April 2023. This is a very bullish forecast. The rate differential will rise in favor of the New Zealand dollar since the Fed is expected to raise the rate 4-5 times during this period.
ANZ sees growing inflationary pressures as the main reason for the tightening of forecasts, and not so much external as internal, based on a significant shortage of labor. Inflation data for the 4th quarter will be released on January 27. It is expected to show an increase of 6% yoy, which is twice the upper limit of the target range of 1-3%.
However, investors have not started buying the NZD yet. It is possible that we are currently near the bottom point. The futures market is also still standing still. According to the CFTC report, the weekly correction of the net short position amounted to only 20 million, reporting to -564 million.
The New Zealand stock market fell about the same as global indices, there is no outstripping growth in the T-bills yields. At the same time, the drop in the settlement price has slowed down, and it is quite possibly ready for an upward reversal.
It is assumed that the support at the border of the channel 0.6610/20 will hold, but it will largely depend on whether inflation will show growth in line with forecasts or even higher. The nearest target is 0.6830/40, which is the middle of the channel.
AUD/USD
The Australian economy looks somewhat worse than in New Zealand. The NAB Business Confidence Index sharply declined from 12p. to -12p in December, while a rise to 16p was predicted, i.e. to a level lower than that observed during the Delta outbreak. This is more surprising given that Omicron is now assessed as a weaker strain of COVID-19 and it is midsummer in Australia when seasonal virus activity is reduced.
However, a fact is a fact. Capacity utilization and orders have fallen amid widening supply chain disruptions and rising inflation. NAB is forced to admit that there are signs of a slowdown in the economy.
At the same time, inflation is growing. The inflation data for the 4th quarter were published this morning, which rose 3.5% y/y. It is higher than expected. Therefore, the RBA should now also recalculate its forecasts. So far, the markets assume that there will be no rate hike until wage growth exceeds 3%, that is, in terms of the degree of tightening of policy. In this case, the RBA will lag behind both the Fed and even more so the RBNZ.
Despite the fact that the net short position has narrowed slightly (+241 million), the bearish edge remains more than significant (-6.355 billion). The settlement price shows no signs of a reversal, from which it can be concluded that the exit from the bearish channel is being postponed indefinitely.
The AUD/USD pair is now trading near the middle of the channel. The target is set at 0.6995 and then 0.6860/80. A sharp increase in risk demand may lead to a price reversal, which is unlikely in the current situation.