This week our currency strategists focused on the New Zealand CPI update and the Australian employment update for potential high-quality setups.
Out of the eight scenario/price outlook discussions this week, two discussions arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay. Check out our review on those discussions to see what happened!
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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NZD/USD 1-Hour Forex Chart by TradingView
On Tuesday, our strategists had their sights set on the New Zealand CPI update for Q3 2024 and its potential impact on the New Zealand dollar. Based on our Event Guide, expectations were for inflation to ease from 3.3% y/y to 2.0% y/y, while quarterly inflation was expected to tick up from 0.4% q/q to 0.5% q/q.
With those expectations in mind, here’s what we were thinking:
The “Kiwi Climb” Scenario:
If the CPI came in hotter than expected, we anticipated this could weigh against speculations of near-term interest rate cuts from the RBNZ, possibly giving the Kiwi some wings against its counterparts. We focused on NZD/JPY for a potential long strategy if broad risk sentiment leaned net bullish , especially given the recent warnings about potential yen intervention from Japanese officials. If broad risk sentiment was leaning more adverse, NZD/CAD long was our pair of choice given the recent dovish speculation on upcoming Bank of Canada interest rate policy.
The “Kiwi Crash” Scenario:
If New Zealand’s inflation data disappointed, mainly showing a significant slowdown in price growth, we thought this could weaken the Kiwi. In this case, we considered NZD/USD for potential short strategies in a broad risk adverse environment, also given the pair’s recent downtrend and the formation of a bearish flag-like pattern on the 1-hour chart. In a risk-on environment, AUD/NZD long made sense given the RBA’s general stance that the inflation fight isn’t done yet, lowering the odds of aggressive rate cuts ahead for now.
What Did the Data Say
Well, folks, Tuesday rolled around, and the New Zealand CPI update decided to mix it up a bit. The Q3 2024 inflation update showed a 0.5% q/q rise, matching expectations. However, the annual inflation rate dropped more than anticipated to 1.8% y/y, below the forecast of 2.0% y/y and marking the slowest pace since Q1 2021.
Key points from the CPI report:
- The quarterly increase was driven by higher prices for housing and household utilities (+0.9%), and food (+0.8%).
- Non-tradeable inflation, which measures domestic price pressures, eased to 3.0% y/y from 3.8% in Q2.
- Tradeable inflation, influenced by international factors, fell into negative territory at -0.2% y/y.
Market Reaction
The initial market response to the New Zealand CPI data was decisively bearish for the Kiwi across the board, aligning with our “Kiwi Crash” scenario for NZD/USD as risk aversion vibes were in play thanks to a weakening global inflation picture, Chinese growth concerns and conflict in the Middle East.
Looking at our NZD/USD chart, we can see that the pair saw an immediate drop following the CPI release, falling from around the 0.6080 level to solidify a break of the bearish flag pattern we had identified in our original discussion.
The pair’s downward momentum was limited, though, to the S1 pivot point (0.6047), which kept the bears at bay, while 0.6080 was the limiting factor to the upside. This choppy price action may have had a lot to do with a broad shift towards positive market sentiment (likely with the help of positive U.S. earnings data supporting risk-on vibes), and several U.S. economic updates that kept the picture a little bit uncertain.
The Verdict
So, how’d we do? In our original discussion, we mentioned potential short setups on NZD/USD if New Zealand’s inflation data disappointed, which it did. If that strategy was followed, it’s “likely” that it supported a net positive outcome, but how the position would have been entered would have been a large factor there. For those who waited to short on the bounces, had several chances to take small profits at the S1 line, or at least break even before the weekly close.
AUD/NZD 1-Hour Forex Chart by TradingView
On Wednesday, our strategists had their sights set on the upcoming Australian jobs report for September 2024 and its potential impact on the Australian dollar. Based on our Event Guide, expectations were for a net employment change of +22.0K, down from the previous +47.5K increase. The unemployment rate was expected to hold steady at 4.2%.
With those expectations in mind, here’s what we were thinking:
The “Aussie Advance” Scenario:
If the employment data came in stronger than expected, particularly with higher job gains or a lower unemployment rate, we anticipated this could draw in fundie buyers to boost the Aussie. We focused on AUD/CHF for potential long strategies if broad risk sentiment was net positive. If traders were feeling broadly bearish, we looked to AUD/NZD, which would have had a strong case given the weak NZ CPI report earlier this week.
The “Aussie Avalanche” Scenario:
If the jobs data disappointed, mainly showing lower job gains or a higher unemployment rate, we figured this could weaken the Aussie. In this case, we considered AUD/JPY for potential short strategies in a broad risk-off environment, while AUD/CAD looked like a good choice, especially if China became clearer with their stimulus plans.
What Actually Happened
Well, folks, Thursday rolled around, and Australia’s jobs report decided to serve up a platter that would make even the most seasoned forex chef nod in approval. The data from the Australian Bureau of Statistics (ABS) showed that the economy added a whopping 64.1K jobs in September, significantly outpacing the expected 25.2K increase.
Key points from the jobs report:
- The unemployment rate remained steady at 4.1%, beating expectations of a rise to 4.2%.
- Full-time employment increased by 51.6K, while part-time hiring rose by 12.5K.
- The participation rate improved from 67.1% to 67.2%.
- The previous month’s figures were revised, with the unemployment rate adjusted down from 4.2% to 4.1%, though the employment change was downgraded from 47.5K to 42.6K.
Market Reaction
The initial market reaction to the stellar jobs report was decisively bullish for the Australian dollar across the board. And with NZ CPI coming in weak just his week, we thought AUD/NZD was the way to go as the fundamental arguments were pretty clear for both sides. We can see that the pair saw an immediate jump following the data release, climbing from around the 1.0980 level towards the R1 pivot point at 1.1037.
AUD/NZD’s upward momentum was supported by the stark contrast between Australia’s robust labor market and New Zealand’s recent softer economic indicators. The pair pushed past the R1 pivot and reached towards the October highs near the 1.1100 handle.
By Friday’s close, AUD/NZD was hovering around the 1.1050 level, having found resistance just shy of the R2 pivot point at 1.1097. The pair maintained most of its post-jobs report gains, supported by additional positive data from China, including better-than-expected retail sales and industrial production figures.
RBA Deputy Governor Michelle Bullock’s comments on Friday that the central bank remained committed to bringing inflation down to target added further support to the Aussie, reinforcing the hawkish implications of the strong jobs data.
The Verdict
So, how’d we do? In our original discussion, we mentioned potential long setups on AUD/NZD if Australia’s jobs data came in stronger than expected, which it certainly did. If that strategy was followed, it’s “highly likely” that it supported a net positive outcome, given that the market saw strong bullish momentum and closed well above both the event price areas at the Friday close, and spent a lot time this week above the discussion price.
