We’ve had a plethora of risk events to contend with this week including numerous central bank meeting, important data and various policymakers speaking. The cautious remarks by Fed Chair Powell have been most market moving for the macro picture. However, the Fed is on a path to policy normalisation which should help the greenback against those low yielding currencies whose central bank is on “go-slow”.

It has been a mixed session overnight in Asia with losses in Japan and China offset by strength in the Hang Seng and ASX 200 indices. A new surge in Covid infection in Japan has hurt the Nikkei while profit-taking in TSMC, the Taiwanese chip giant, is weighing on other tech firms and the broader risk sentiment. This comes after a quiet US session with the Dow just about making it into the green, but the tech-heavy Nasdaq suffering losses of 0.71%.

The dollar bounced back yesterday with broad gains and is so far unchanged on the day. Concerns about a slower recovery across the globe still lurk in the background even as inflation prints worry many investors. The DXY is trapped at the moment in a 92-93 range with EUR/USD trading just above 1.18.

Hot inflation in New Zealand sends Kiwi flying

The standout major currency performer today is NZD on the back of sizzling inflation data overnight which accelerated to 3.3% in the second quarter this year. This beat market expectations of 2.7% and was up from the prior 1.5% in Q1. The fastest inflation since 2011 comes days after the RBNZ took a hawkish turn by surprisingly stopping its bond buying programme with almost immediate effect. Many banks now expect a rate hike in August, though the jobs report on 4 August will be hugely important to a central bank who has said it sees the inflation spike as temporary.

AUD/NZD may be the best pair to play the central bank divergence theme between the RBNZ and in this instance, the RBA. The Fed stays in charge in NZD/USD so it is probably more risky to chase the major. Prices dropped to a five-month low in AUD/NZD earlier but have pulled back to near 1.06. The February low at 1.0540 is a key target for the kiwi bulls with a soft weekly close setting the scene for more downside.

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