US DOLLAR TUMBLES TO THREE-MONTH LOWS, RBNZ UP NEXT

Headlines

* Euro climbs above 1.10 for the first time since August as USD slides

* Fed Governors clash on direction of interest rates

* RBNZ to hold rates steady but may push back against easing bets

* Gold extends gains on Fed pause bets and dollar retreat

FX: USD fell for a fourth straight day hitting levels last seen in August. The greenback is on track for its biggest monthly drop in a year. Fed Governor Waller bolstered bets on policy easing by flagging the chance of lowering rates. However, another Governor, Bowman, said the Fed will likely need to raise borrowing costs to bring inflation back to target. The 61.85 retrace level of the summer rally is 102.54.

EUR advanced to a top at 1.1008 before closing just below the figure. The dollar weakness is pushing the pair higher. There is now better than a one in three chance of a 25bp Fed rate cut at its March meeting. The major is now above the 61.8% Fib level of the summer drop at 1.0959. Prices are overbought but bulls may eye 1.11 as the next upside target.

GBP pushed north again for a fourth straight day to a new high at 1.2715. The next major Fib level is at 1.2720. Monday saw BoE Governor Bailey push back against rate cuts while acknowledging encouraging news on inflation.

USD/JPY fell sharply and close to last week’s low at 147.15. US 10-year Treasury yields fell below major long-term support at 4.34%. The major printed a high at 151.90 in the middle of this month.

AUD advanced up to the next big Fib level at 0.6659, a four-month top. Eyes are on CPI data after the aussie snubbed poor retail sales figures. The shift in the yuan from a headwind to a tailwind has helped AUD to move beyond major resistance.  

Stocks: US equities were choppy but finished marginally in the green. The S&P 500 added 0.1% to settle at 4554. The tech-dominated Nasdaq 100 finished 0.3% lower at 16,010. The Dow edged 0.24% up to close at 35,416. Micron updated Q1 guidance due to improved supply and demand balance. Disney CEO Iger told employees that the task he faced after returning a year ago was harder than expected.

Asian futures are mixed. APAC stocks traded mixed Tuesday amid the lower yield environment and subdued performance on Wall Street. The ASX 200 broke 7,000 although the index closed off its intraday highs after the surprise contraction in retail sales.

Gold extended its four-day win streak, surging 1.33% higher to $2040. The record close was $2050 hit in May. Falling yields and the dollar are boosting the appeal of the precious metal. Markets are currently pricing in a 50% chance that the Fed could begin cutting rates in May next year. Thursday’s US PCE price data will be key for price action.

Day Ahead – RBNZ Meeting, Australia CPI

The RBNZ is expected to stand pat again and leave rates unchanged at 5.50%. Recent data including inflation, wage growth and the labour market has all softened more than anticipated.  The bank will publish forecasts with near-term inflation projections likely to be cut, but little changed further out. Money markets price in a first rate cut for next summer.

Australian monthly CPI is forecast to print at 5.2%, down from the prior 5.6%. October is the first month of the quarter so there are lots of quarterly goods’ surveys which should make for an accurate consensus estimate. Markets are wagering on the RBA hiking again after lifting rates to a 12-year high at 4.35% earlier this month. There is around a 60% chance of a rate rise in the first half of 2024.

Chart of the Day – NZD/USD surges through the 200-day SMA

The RBNZ could discourage rate cut expectations at its meeting which would help the bullish momentum seen in the kiwi recently. External factors including the strong dollar sell-off and improved risk sentiment have boosted the currency. Prices bottomed out in the major around 0.58 in late October. Buyers took out the 200-day SMA at 0.6090 and the halfway point of the July/October drop at 0.6092 yesterday. The next Fib level (61.8%) is 0.6167.

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