NZD/USD bulls step back in as Wall Street rallies

• NZD/USD rallies as risk appetite picks up again.
• US CPI has been taken positively by the markets. 

NZD/USD is higher on the day by some 0.5% after traveling from a low of 0.6324 to reach a high of 0.6381 so far. Risk has bounced again in late Wall Street and that has taken the high beta currencies higher. 

´´Markets reacted positively to the April CPI report, as the continued moderation in shelter inflation left the market unconvinced the FOMC will raise rates again in June,´´ analysts at ANZ Bank explained.

´´The Kiwi put in another reasonable performance overnight, on crosses (see below) and against the USD, and according to Bloomberg, it remains the best-performing G10 currency week to date. As-expected US CPI data came as a relief to markets, and while it was enough to see US bond yields fall, the subsequent fall in equities and commodities dimmed the impact on risk currencies, with the USD DXY paring losses quickly´´ the analysts added and said further:

´´With global markets clearly in no mood to entertain the idea of more Fed hikes, the risk is we see more USD weakness, but with “Fedspeak” likely to have a hawkish bent, expect volatility. The Budget will be key for NZ next week, and today we have food prices, which might surprise some.´´

As for the Federal Reserve,  analysts at Brown Brothers Harriman noted that the ´´Federal Reserve easing expectations are starting to get pared back.´´

´´At the start of last week, swaps market was pricing in a Fed Funds range between 4.0-4.25% in 12 months.  Earlier, it was as low as 3.5-3.75% but now it's back in the 3.75-4.0% range in 12 months.  Three cuts by year-end were fully priced in at the start of this week but the odds of a third hike have fallen to around 60% currently,´´ the analysts said. 

´´That said, market expectations of a Fed pivot are misguided and must be repriced.  Fed officials are likely to continue pushing back against this dovish take but it will really be up to the data.´´

Meanwhile, the Reserve Bank of New Zealand, Chrisitan Hawkesby explained at the end of April that the full impact of tightening is yet to be fully seen.

Key notes

• Early signs growth starting to slow.
• Extent of moderation will determine policy.
• Inflation too high and persisten.