This week our currency strategists focused on the New Zealand CPI update and the Australian Employment update for potential high-quality setups.
Of the eight scenario/price forecast discussions this week, Arguably, two discussions saw both financial and technical arguments raised They become potential candidates for overlay trading and risk management. Check out our review of those discussions to find out what happened!
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NZD/USD 1 Hour Forex Chart by TradingView
On Tuesday, our strategists set their sights on the New Zealand CPI update for Q3 2024 and its potential impact on the New Zealand dollar. Based on our events guide, inflation was expected to fall from 3.3% y/y to 2.0% y/y, while quarterly inflation was expected to rise from 0.4% q/q to 0.5% q/q.
With these expectations in mind, here’s what we were thinking:
“Kiwi climbing” scenario:
If the CPI comes in hotter than expected, we would expect that to impact expectations for near-term interest rate cuts from the Reserve Bank of New Zealand, which could give the Kiwi some wings against its peers. We focused on NZD/JPY as a potential long strategy if broad risk sentiment turns to the net upside, especially in light of recent warnings about potential intervention in the yen from Japanese officials. If overall risk sentiment leans more negative, NZD/CAD has been our long-term favorite given the recent dovish speculation on the Bank of Canada’s upcoming interest rate policy.
“Kiwi Collapse” scenario:
If New Zealand inflation data disappoints, mainly showing a significant slowdown in price growth, we thought this could weaken the New Zealand dollar. In this case, we considered the NZD/USD pair as potential selling strategies in a broad-based risk-negative 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-laden environment, the AUD/NZD has long made sense given the Reserve Bank of Australia’s general stance that the fight against inflation is far from over, reducing the odds of significant interest rate cuts for now.
What did the data say?
Well guys, it’s Tuesday, and the New Zealand CPI update decided to mix things up a bit. The Q3 2024 inflation update showed a rise of 0.5% QoQ, in line with expectations. However, the annual inflation rate fell more than expected to 1.8% y/y, which is below expectations of 2.0% y/y and represents the slowest pace since the first quarter of 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%).
- The non-tradable inflation rate, which measures domestic price pressures, fell to 3.0% year-on-year from 3.8% in the second quarter.
- Tradable inflation, influenced by international factors, fell to negative territory at -0.2% year-on-year.
Market reaction
The initial market response to the NZD CPI data was decisively bearish for the NZD across the board, in line with a ‘NZD collapse’ scenario for NZD/USD, as risk aversion sentiment was at play thanks to a weak global inflation picture, and Chinese growth concerns. . And the conflict in the Middle East.
Looking at the NZD/USD chart, we can see that the pair saw an immediate decline following the CPI release, falling from around the 0.6080 level to solidify the breakout of the bearish flag pattern we identified in our original discussion.
However, the pair’s downward momentum was limited at the S1 pivot point (0.6047), which kept the bears bearish, while 0.6080 was the limiting factor for the upside. This choppy price action may have a lot to do with the broad shift towards positive market sentiment (likely helped by positive US earnings data supporting risk sentiment), and several US economic updates that have kept the picture a bit uncertain.
Judgment
So, how do we do? In our original discussion, we mentioned a potential sell-off in NZD/USD if New Zealand inflation data disappoints, which it has. If this strategy is followed, It is “probable” that it supports a net positive outcomebut how you enter the position could have been a big factor there. For those who waited to sell the bounce, they had many opportunities 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 set their sights 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 increase of +47.5K. The unemployment rate was expected to stabilize at 4.2%.
With these expectations in mind, here’s what we were thinking:
“Australian Progress” scenario:
If employment data comes in stronger than expected, particularly with job gains rising or the unemployment rate falling, we expect this will attract fund buyers to support the Australian dollar. We focused on AUD/CHF for potential long strategies if broad risk sentiment is positive. If traders were feeling broadly bearish, we would look to the AUD/NZD, which would have made a strong case given the weak New Zealand CPI report earlier this week.
“Australian collapse” scenario:
If the jobs data was disappointing, mainly showing lower job gains or higher unemployment, we would expect this to weaken the Australian dollar. In this case, we viewed AUD/JPY as a potential short selling strategy in a broad-based risk-off environment, while AUD/CAD looked like a good option, especially if China becomes more explicit in its stimulus plans.
What actually happened
Well folks, it’s Thursday, and the Australian Jobs Report has decided to introduce a dish that would make even the most experienced Forex chefs agree. Data from the Australian Bureau of Statistics (ABS) showed the economy added 64.1k jobs in September, significantly outpacing the expected increase of 25.2k.
Key points from the jobs report:
- The unemployment rate remained stable at 4.1%, exceeding expectations for a rise to 4.2%.
- Full-time employment increased by 51.6 thousand, while part-time employment increased by 12.5 thousand.
- The participation rate improved from 67.1% to 67.2%.
- The previous month’s numbers were revised, with the unemployment rate revised from 4.2% to 4.1%, although the change in employment was reduced 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. With the New Zealand CPI weakening just this week, we thought AUD/NZD was the way to go as the fundamental arguments were very clear on both sides. We can see that the pair saw an immediate jump after the data was released, rising from around the 1.0980 level towards the R1 pivot point at 1.1037.
The bullish momentum of the AUD/NZD pair was supported by the stark contrast between Australia’s strong labor market and recent weak economic indicators in New Zealand. The pair pushed past the R1 level and reached October highs near the 1.1100 level.
By Friday’s close, the AUD/NZD was hovering around the 1.1050 level, having found resistance near the R2 pivot point at 1.1097. The pair maintained most of its gains after the jobs report, supported by additional positive data from China, including better-than-expected retail sales and industrial production numbers.
Reserve Bank of Australia Deputy Governor Michael Bullock’s comments on Friday that the central bank remains committed to lowering inflation to its target level added further support to the Australian dollar, reinforcing the hawkish implications of strong jobs data.
Judgment
So, how do we do? In our original discussion, we mentioned potential long setups on the AUD/NZD if Australian jobs data came out stronger than expected, which it certainly did. If this strategy had been followed, it “very likely” would have supported a net positive outcome, given that the market saw strong upward momentum and closed well above the two event price zones at Friday’s close, and spent much of the time this week above the average level. Discussion price.