NZD/USD stays on the way to 0.7100 after the first weekly gain in four

• NZD/USD begins the week’s trading near Friday’s close.
• US dollar gains fade as Fedspeak rejects reflation fears.
• Wellington stays on Level 2 alert with no new cases, Australia extends covid-lockdown in wider Sydney.
• Light calendar may disappoint momentum traders, Fedspeak, China PMI can entertain markets ahead of Friday’s US NFP.

NZD/USD wobbles around 0.7070, mostly unchanged, to start the week’s Asian session on Monday. The Kiwi pair snapped a three-week downtrend by Friday’s closing as US Federal Reserve (Fed) officials’ battle with reflation and President Joe Biden’s infrastructure spending favored market sentiment even upbeat US data keeps rate hike woes on the table.

US Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge o Inflation, jumped to the highest in the near three decades with 3.4% YoY figures in May. The data exerted additional pressure on the Fed to rethink its “transitory” outlook for inflation. Even so, the Fedspeak kept taming the reflation woes. Minneapolis Federal Reserve President Neel Kashkari said, “Expecting to see some of the very high inflation readings to return back down to normal." On the contrary, Boston Federal Reserve President Eric Rosengren said on Friday that they have to think about some of the side effects of a low-for-long interest rate strategy, as reported by Reuters.

While the US data favored the market’s inflation fears and put a safe-haven bid under the US dollar, Fedspeak trimmed the greenback's gains during late Friday. The same trimmed the equity gains and backed the US Treasury yields, albeit mildly, which in turn offered a mixed day for the NZD/USD traders.

At home, Wellington’s Level 2 alert, without any fresh cases, for another 48 hours joins wider virus-led activity restrictions in Sydney to probe the kiwi pairs buyers. It’s worth noting that weekly updates over China’s Industrial Profits for May, 36.4% YoY versus +57.0% prior, also tests the NZD/USD pair buyers.

Even so, the comparatively easy rate-hike of RBNZ, versus Fed, keeps NZD/USD buyers hopeful even though USD strength and risk appetite offer intermediate moves. “The Fed is widely expected to advance its communication on tapering during Q3. The baseline market expectation is that tapering will start in January and run at USD10bn per month. However, if inflation stays elevated, tapering might have to start sooner and happen at a faster pace. Meanwhile, here in New Zealand, the risk is increasing that the second half of the year brings not just discussion, but action in the form of an OCR hike (note our current forecast is Feb 2022). QE is less of a constraint to hike timing here, with tapering already well underway and the market coping well with a steady reduction in weekly QE purchases from an early peak of NZD1.8bn to around NZD200 million today. The picture could change, but as things stand, the program is on track to cease purchases by the end of the year without any drama,” said the Australia and New Zealand Banking Group (ANZ).

Looking forward, a lack of major data/events during the day, also the week, may restrict short-term NZD/USD moves while comments from Fed policymakers, China’s official PMIs for June may entertain traders ahead of Friday’s key US jobs report.

Technical analysis

Although a sustained break of 200-day SMA, near 0.7050, keeps buyers hopeful, lows marked in January and early March guards immediate upside of NZD/USD around 0.7100.