The US stock indices updated their historical highs after the publication of the ISM index for March. The S&P 500 gained 1.44% during the past day, closing at 4078. The mood of investors is dominated by expectations of the start of Biden's ambitious new infrastructure plan.
All the recent American economic news falls into the category of strong or very strong. ISM's report on the services sector was no exception – the index came out at the level of 63.7p last month, which is the highest figure since 1997.
The services sector accounts for about 75% of US GDP, so the ISM index is a key parameter by which investors make estimates about the pace of economic recovery. All components of the ISM, such as business activity, employment, new orders and prices, increased significantly compared to the data for February. In particular, the price component is at its maximum since 2008, that is, from the moment when the peak prices for raw materials were observed.
The US dollar sentiment was confidently bearish before 2021. However, everything is changing right now. The dollar will experience a strong bullish rally in the current conditions, as the US economic recovery will lead to the need for the Fed to raise the rate before other central banks.
The weekly change in the futures market was insignificant. According to the CFTC, the net long position on NZD declined by 48 million to 282 million. There is only a minimal advantage and the dynamics is negative. The estimated price is steadily declining.
The growth of the New Zealan dollar was largely driven by the strong recovery of the New Zealand economy, which, in turn, was supported by the rapid growth of the housing and construction sectors. However, there have been a number of negative changes last month. The government has stopped subsidizing a number of housing programs, and the construction sector is facing a number of problems amid rising costs, confidence, activity, investment and profits declined-clear signs of some restrictions.
The end of summer in the southern hemisphere increases the probability of a new surge in COVID-19 and as a result, new restrictions. The chances of positive changes in the yield spread in view of large-scale stimulus in the US are insignificant. The direction of financial flows is turning in favor of an exit from the New Zealand currency.
It can be assumed that the corrective growth is almost done. The low of 0.6937 is likely to be updated. The target remains the same, that is, 0.6750/90.
As expected, the RBA did not make any changes to its monetary policy. The regulator was forced to admit that wage and price growth has slowed and the economy is operating with significant spare capacity while noting that the Australian economic recovery is on progress and stronger than expected. Such a trend that will continue for several more years.
The RBA is finalizing a $ 100 billion asset purchase program, but a second $ 100 billion program will begin next week, and the rate will not increase until inflation steadily enters the 2-3% range. This requires wage growth to be substantially higher, which will require a significant increase in employment and a return to a limited labor market. The board does not expect that these conditions will be met until 2024, which means that the expectations for the rate at the moment are changing in favor of the Fed, which is expected to be forced to respond to price increases earlier than planned. In fact, the results of the RBA meeting should be regarded as bearish for the Australian dollar.
As for the futures market, the AUD maintains its advantage, but the dynamics is in favor of the USD. The same is observed in the stock and debt markets. The estimated price is steadily moving down.
It can be assumed that the Australian dollar will decline again after the consolidation period is done. The targets remain unchanged. We expect the level of 0.7562 to be retested in the near future and then move to the next target of 0.7417.