Fundamental analysis

The recession is closer than it seems, and inflation is higher than we would like. Overview of USD, NZD, AUD

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The PMI indices published on Monday were generally weaker than forecasts. The eurozone composite index fell to 47.1 from the expected 48.1 and 47.6 due to production growth, which fell sharply to 46.6 from 48.4, the forecast components of the survey indicate further contraction, and the figures for Germany look particularly gloomy. The index of business activity in the United States also unexpectedly decreased, to 47.3 from 49.2, with a sharp drop in the index of business activity in the service sector from 49.3 to 46.6. In the US market, there is traditionally more attention to ISM indices, however, the indices from S&P Global give a clear picture – the recession may be closer than it seems.

Despite the fact that China’s GDP growth rate in Q3 (data published on Monday) turned out to be better than forecasts, the release did not have a positive impact on currencies dependent on China, such as NZD and AUD. The reason for this is the expanding Covid restrictions in China, which put pressure on demand and, as a result, on the foreign trade balance of Australia and New Zealand.

Markets are likely to win back the growth of risk appetite, the latest signal received from the Federal Reserve is a willingness to slightly reduce the pace of rate hikes. This signal was first issued as an insider from the WSJ, then received confirmation from a member of the Fed, Mary Daly, after which there was a week of silence, which means that there will be no new clarifications. Accordingly, it is no longer necessary to expect the dollar to grow in the current conditions, we assume trading in a sideways range, the risks are shifting in favor of some weakening of the dollar.

NZDUSD

The inflation report for the third quarter turned out to be gloomy. After reaching a multi-year high of 7.2% in Q2, it was expected that inflation would fall to 6.5%, but the decline was barely noticeable (+7.2%), but the components of core inflation rose without exception.

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Service inflation is also still accelerating, which is unlikely to change in the near future, given the extremely low unemployment rate and wage growth.

A strong increase in core inflation forces us to revise the forecasts for the rate. ANZ Bank believes that already in February 2023, the Reserve Bank of New Zealand rate will rise to 5%, that is, the RBNZ will be ahead of the Fed in the rate of rate growth, which will give the kiwi a chance to start growing against the dollar. The forecast for the next RBNZ meeting in November changed in favor of a 75p increase, clarity may come on November 2, when the quarterly report on the labor market will be published. If it turns out to be stronger than forecasts, and everything is going to that, then the chances of a faster tightening by the RBNZ will increase, which may lead to an increase in interest in the New Zealand dollar.

But it’s too early to talk about it yet. Net short position on NZD, as follows from the CFTC report, decreased by 15 million during the reporting week, to -1.05 billion, the positioning is bearish, there are no signs of a change in the mood of the players. The estimated price is below the long-term average, it is directed downwards, the kiwi continues to remain under pressure.

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The probability of NZDUSD’s exit above the resistance zone of 0.5760/85 is regarded as low, short positions from current levels and a stop above 0.5810 are relevant, the target is the Covid low of 0.5464 from March 2020, where an attempt to break through below is likely. This scenario will be canceled if the labor market report turns out to be better than expected and the forecast for the RBNZ rate is revised upward.

AUDUSD

The key events for Australia this week will be the presentation of the budget in the first reading tonight and the release of the inflation report for the 3rd quarter on Wednesday. The budget may have an impact on the aussie rate in terms of GDP forecasts and the overall balance of expenses and income, which will have a certain impact on the RBA’s position, as for inflation, the forecast for the moment is growth by 1.5% q/q, while the risks, as in the case of New Zealand, are shifted upward. If inflation turns out to be higher than forecasts, the aussie will follow approximately the same scenario as the New Zealand dollar – the forecasts for the RBA rate will be revised upwards, which may lead to the formation of a corrective bullish momentum for the aussie. But until the report is published, it’s too early to talk about such a scenario.

The net short position on AUD increased by 269 million during the reporting week, to -2.231 billion, the positioning is bearish, the estimated price is below the long-term average and is directed downward. There are no signs of the aussie turning upwards.

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The probability that AUD USD will rise above the local high of 0.6414 is low, it is reasonable to use bullish attempts for shorts, the long-term goal is still 0.5513.

The material has been provided by InstaForex Company – www.instaforex.com