NZD/USD looking vulnerable to a break below 0.6400 as Wall Street craters

• FX markets didn’t react much to the latest US jobs data, but could react to a continued drop in US equities.
• NZD/USD looks vulnerable to a potential fall below 0.6400 and test of support in the 0.6380 area.
• The main focus next week will be on US CPI data.

While FX markets did not see much of a reaction to a largely as expected US labour market report that hasn’t been interpreted as having much of an impact on Fed tightening expectations, a continued collapse in Wall Street sentiment looks likely to weigh on NZD/USD on Friday. Less than one hour since the US open, the S&P 500 index is trading a further nearly 2.0% lower, after cratering more than 3.5% on Thursday.

Traders are citing a combination of factors from concerns about the rapid pace of expected Fed tightening this year to the weakening outlook for global growth amid still sky-high inflation. The net result for NZD/USD is that Thursday’s highs in the upper 0.6500s now look well in the rear-view mirror and a break below 0.6400 and towards 0.6380 support appears to be on the cards.

If US yields, which broke higher this week (the 10-year went above 3.0% for the first time since December 2018), continue their upwards march next week and risk appetite in equities remains ropey, it’s a good bet to think that the US dollar will remain bid. A break below 0.6380 in NZD/USD could open the door to a run lower to the next supply zone in the 0.6200 region.

The main focus next week will be on April US Consumer Price Inflation data, out on Tuesday. But NZD/USD traders would also do well to keep an eye on quarterly New Zealand Inflation Expectations figures out on Thursday, as this will likely have an impact on RBNZ tightening expectations.