The NZD/USD exchange rate suffered a harsh reversal after the strong US jobs numbers and as traders positioned for this week’s Reserve Bank of New Zealand (RBNZ) interest rate decision. It slipped by over 3.5% from its highest point this year to the current 0.6165.

RBNZ interest rate decision

The RBNZ will be one of the few central banks that will deliver their interest rate decisions this week. The rest will be banks from South Korea and India.

Economists believe that the bank will deliver a big interest rate cut since the country’s inflation has moved downwards since 2022. It peaked at 7.3% in the second quarter of 2022, and has dropped in each of the next consecutive quarters.

The most recent data showed that the headline CPI fell from 4.0% in Q1 to 3.3% in the secons quarter. The CPI figure was lower than the median estimate of 3.5%. 

Analysts believe that the upcoming CPI data will show that inflation dropped below 3% for the first time in months.

At the same time, there are signs that New Zealand’s economy was slowing. Recent data showed that the country’s unemployment rate rose from 4.3% to 4.6% in the second quarter. 

Wage growth has also slowed while the recent GDP data showed that the economy contracted by 0.2% in the last quarter. 

Therefore, analysts believe that the RBNZ will decide to cut interest rates by 0.50%, especially now that other banks have started their cutting interest rates. In a note, ING analysts said:

“We expect a 50bp cut to 4.75% at the October meeting, which is in line with consensus, but more dovish than the RBNZ projections, which included 50bp of total easing in 4Q24 (the next meeting is in November).”

Strong US dollar 

The NZD/USD exchange rate continued falling because of the strong US dollar as geopolitical issues rise and as hopes of a more aggressive Fed fade.

The US dollar index (DXY), which measures the strength of the USD against a basket of currencies, rose for six consecutive days, reaching a high of $102.50, its highest point since August 2024. It has jumped by over 2.3% from its lowest point this year.

The USD is being driven by the rush to safety as geopolitical issues in the Middle East continue. Analysts expect that Israel will attack Iran’s energy infrastructure soon to retaliate against last week’s bombing campaign. 

Attacking Iran’s key infrastructure will likely lead to more violence in the region, which will lead to higher oil prices and inflation. Recent data shows that the price of Brent and West Texas Intermediate (WTI) rose to over $75. 

Looking ahead, the next key NZD/USD catalyst will be the Federal Reserve minutes and the US inflation data. 

These minutes will provide more information about the deliberations that happened in the last meeting when the bank decided to cut rates by 0.50%

Economists expect the upcoming data to show that the headline Consumer Price Index (CPI) retreated from 2.5% in August to 2.3% in September. Core inflation, which excludes the volatile food and energy prices is expected to drop from 3.2% to 3.0%. 

These numbers, while important, will not have a big impact on the Federal Reserve, which is mostly focusing on the labor market.

Data released last week shows that the unemployment rate slipped to 4.1% while the economy created more jobs than expected. 

Therefore, analysts expect that the Fed will go slow on interest rate cuts, with Larry Summers arguing that the bank should embrace a wait-and-see attitude. Other analysts expect the bank to cut rates in smaller increments. In a note, ING analysts said:

“For now we continue to expect 25bp rate cuts through to next summer with the Fed funds bottoming at around 3.25-3.5%, whereas the market has it dropping to just below 3%.”

NZD/USD technical analysis

NZD/USD chart by TradingView

The daily chart shows that the NZD to USD exchange rate peaked at 0.6370 last month and then suffered a harsh reversal to the current 0.6165. It has dropped to its lowest point since September 16.

The pair has dropped below the 50-day and 25-day Exponential Moving Averages (EMA) while the Relative Strength Index (RSI) has moved below the neutral point at 50. Other oscillators like the MACD and the Stochastic Oscillator have all pointed downwards. 

The pair has moved to the top of the trading range of the Murrey Math lines tool. Also, the pair has dropped below the key support at 0.6220, its June and February highs.

Therefore, the NZD/USD pair will likely continue falling as sellers target the next key support at 0.6100. The stop-loss of this trade will be at 0.6221.

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Asian-Pacific markets advanced on Monday, with Japan’s Nikkei 225 leading the way, climbing nearly 2% as investors anticipated key central bank decisions across the region.

Strong performances in financials, consumer cyclical stocks, and a significant boost from gaming giant Nintendo drove the index’s gains.

Meanwhile, the US jobs report added to global optimism, pushing the dollar higher and easing concerns over further Federal Reserve rate cuts.

Nintendo shares rise after Saudi investment interest

Japan’s Nikkei 225 surged 2.18%, with shares of Nintendo jumping 3.8% following reports that Saudi Arabia’s sovereign wealth fund is considering raising its stake in the company.

This news comes as part of broader interest by the fund in Japanese gaming firms.

Financial companies such as Mizuho Financial Group and Mitsubishi UFJ Financial Group also contributed to the Nikkei’s gains.

The yen, meanwhile, strengthened 0.16% to trade at 148.46 after hitting its weakest level in over two months earlier in the session.

New Japanese Prime Minister Shigeru Ishiba remarked that the environment was not yet ready for additional rate hikes by the Bank of Japan, further adding pressure on the yen.

Central banks in focus: Korea, New Zealand, India

Three major central banks in the Asia-Pacific region will make key interest rate decisions this week.

The Bank of Korea (BOK), the Reserve Bank of New Zealand (RBNZ), and the Reserve Bank of India (RBI) are all set to release their decisions, with economists predicting rate cuts from the BOK and RBNZ while expecting the RBI to maintain its current stance.

A Reuters poll indicated that the BOK might lower its benchmark rate to 3.25% from 3.5%.

Meanwhile, the RBNZ is expected to make a 50-basis-point cut to 4.75% following an unexpected rate cut in August. The RBI is forecast to hold rates steady, as India contends with inflationary challenges and global economic uncertainties.

US jobs report drives global optimism

Optimism in the Asia-Pacific markets was further boosted by a strong US jobs report from Friday, which showed that nonfarm payrolls grew by 254,000 in September, well above economists’ forecasts of 150,000.

Additionally, the unemployment rate fell to 4.1%, beating expectations that it would remain at 4.2%.

The positive jobs data has calmed concerns that the Federal Reserve may need further drastic rate cuts, providing a boost to the U.S. dollar and lifting sentiment across global markets.

In response, US stocks rallied on Friday, with the S&P 500 rising 0.9%, the Nasdaq Composite jumping 1.22%, and the Dow Jones Industrial Average gaining 0.81% to reach an all-time closing high of 42,352.75.

Australia’s lithium stocks surge on acquisition news

In Australia, the S&P/ASX 200 rose 0.46%, with lithium stocks leading the charge. Shares of Liontown Resources surged 16.22%, following Rio Tinto’s expressed interest in acquiring US lithium producer Arcadium.

Other lithium players, including Mineral Resources, Pilbara Minerals, and IGO, also saw significant gains, rising 5.06%, 3.61%, and 3.36% respectively.

Arcadium’s Australia-listed shares spiked by more than 42% in response to the news.

Other Asian markets see gains

In South Korea, the Kospi reversed earlier losses to close 0.98% higher, while the small-cap Kosdaq index rose by 1.3%.

Hong Kong’s Hang Seng index advanced 1.14% despite mainland China’s markets remaining closed for the Golden Week holiday, with trading set to resume on Tuesday.

Looking ahead: central bank decisions to shape markets

As investors await this week’s interest rate decisions from central banks in Korea, New Zealand, and India, attention remains focused on how these outcomes will influence market sentiment in the short term.

Additionally, the US Federal Reserve’s response to economic data, such as the strong jobs report, will continue to play a significant role in shaping the global economic landscape.

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Indian benchmark equity indices opened in the green on Monday on positive cues from the Asian markets. 

At the opening bell on Monday, the BSE Sensex was by 412 points, while the Nifty50 rose 110 points.

However, both benchmarks have since then pared the gains. 

At the time of writing, the BSE Sensex was largely unchanged from the previous session at 81,622.94, while the Nifty50 index was also largely flat at 24,987.90. 

Global cues bolstered by strong US jobs data

Asian equity benchmarks rose on Monday after strong US jobs data released on Friday dispelled fears of a recession. 

Japan’s Nikkei led regional equity gains with a 2% rally earlier in the session, aided by the softer yen.

Australia’s stock benchmark was 0.1% higher, while South Korea’s Kospi rose 0.3%. 

Titan pares opening gains

Titan shares opened nearly 2% higher on Monday, and are now currently 2% lower.

The share price of Titan fell even after the company reported positive earnings for the September quarter. Domestic operations grew by nearly 25% on-year led by significant pick-up in consumer demand momentum after the government cut import duty of gold. 

ONGC shares slump more than 3%, Shipbuilding, railways stocks down 7%

ONGC’s stock slumped more than 3% as crude oil prices fell on Monday, while investors booked profits after last week’s gains.

Oil prices declined on Monday as traders waited for Israel’s response to Iran’s attack.

As there have been no  fresh escalations in tensions, oil prices took a breather. 

ONGC is an oil exploration  and production company, and India’s largest crude oil producer.

When oil prices decline, it hurts the profitability of the upstream company. 

Meanwhile, shipbuilding and railways stocks plunged on Monday. 

Shares of Garden Reach Shipbuilders were down 5.8%, while those of Cochin Shipyard slipped 4.4%. 

Rail Vikas Nigam Limited’s stock fell 6.4% and shares of Railtel plunged 6.5% on Monday. 

Additionally, shares of Vodafone Idea were down for the fifth consecutive trading session on Monday.

The stock has fallen over 7.5% on Monday. 

Vodafone Idea’s stock has slipped 31.74% on a month on month basis, and as much as 46.94% in 2024. 

Shares of NBCC and ITC jump

Shares of NBCC (India) surged more than 6% on Monday after the public sector undertaking trades ex-bonus. 

In August, NBCC had announced that from October 7, shareholders listed in the company’s books as of Monday will be eligible for the bonus share issuance. 

Meanwhile, shares of ITC Limited gained more than 2% on Monday after receiving approval from the National Company Law Tribunal (NCLT)  for the demerger of its hotel business. 

The approval was granted on Friday from the Kolkata bench of the NCLT. 

Investors will be keeping a close eye on the policy meeting of the Reserve Bank of India that commences on Monday. 

The market expects the RBI to maintain the repo rate at 6.5%, marking the 10th consecutive meeting with no change. 

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In a period marked by global geopolitical conflict, inflationary pressures, and fluctuating interest rates, the US economy continues to defy expectations. 

With a stronger-than-expected job report for September and equity markets continuing to push through all-time highs, the question arises: is this the most resilient U.S. economy we’ve seen in recent history? 

Investors, businesses, and economists alike are grappling with the paradox of strong job growth, rising wages, and cooling inflation in a climate that should, by most accounts, be much more challenging.

A strong labour market that defies economic theory

For most investors, a robust labour market is usually a sign of economic health. 

More jobs mean more spending, and more spending fuels growth.

But what we’re witnessing now in the US job market is something that goes beyond the usual economic cycle.

Despite a year of aggressive rate hikes by the Federal Reserve, which should theoretically have slowed job growth, the labor market remains incredibly strong. 

Full-time employment surged by 414,000 in September, while part-time positions declined, suggesting businesses are not only hiring but investing in longer-term commitments to their workforce.

This strength in job creation has kept consumer spending afloat, which is crucial for an economy where nearly 70% of GDP is driven by consumer activity.

Yet, there’s a lingering concern that this pace of job growth, coupled with rising wages, could reignite inflation. 

The Federal Reserve has brought inflation down to 2.5% from last year’s high of over 9%, but wage growth at 4% could fuel higher prices if businesses pass on their increased labor costs to consumers.

The paradox here is that, while a strong labor market is good, it complicates the Fed’s goal of stabilizing inflation.

Investors need to keep an eye on how these wage pressures play out in the coming months, as any indication of renewed inflation could shift market sentiment drastically.

Inflation is down, but is it gone for good?

One of the key factors driving optimism about the US economy is the substantial decline in inflation.

After peaking at 9%, inflation has cooled considerably, allowing the Federal Reserve to shift from aggressive rate hikes to more measured cuts. 

But here’s where things get complicated. Inflation may be down, but it’s not entirely gone.

Costs for essential goods and services like housing, healthcare, and child care remain elevated, and wage increases could put pressure on businesses to raise prices again.

What investors need to watch out for here is that if inflation were to spike again, even modestly, the Fed may be forced to reverse course.

This would likely send shockwaves through the financial markets, driving down asset prices and increasing borrowing costs.

The question for investors now is whether the current inflation environment is truly stable or whether we’re in a temporary lull before another uptick.

Given the strength of the labor market and wage growth, it’s wise to wait a little bit longer before celebrating.

How will the fed navigate this unusual economy?

The Federal Reserve’s current approach to interest rates reflects the unusual nature of this economic cycle.

After a larger than expected rate cut in September, the Fed is now expected to cut rates in smaller increments—likely by 0.25% in both November and December.

However, the stronger-than-expected jobs report could complicate this plan.

Higher wages and steady job creation may give the Fed pause as it considers whether further rate cuts are truly necessary.

While the goal is to avoid stifling economic growth, the Fed is also keenly aware of the risks of overheating the economy. 

With interest rates still relatively high compared to pre-pandemic levels, investors should pay close attention to the Fed’s messaging over the next few months.

Any hint that rate cuts will be paused or slowed could have significant implications for the stock market, especially for sectors that are sensitive to borrowing costs, like housing and technology.

Why this economy may be more resilient than you think

While challenges remain, it’s clear that the US economy has displayed a remarkable level of resilience, especially considering the pressures it has faced over the past few years. 

From the Covid-19 pandemic to record inflation to an aggressive interest rate environment, the economy has weathered numerous storms and continues to grow. 

It’s worth noting that businesses have proven to be highly adaptive.

They’ve managed to navigate supply chain disruptions, rising input costs, and shifting consumer behavior without massive layoffs or a significant slowdown in hiring.

Sectors like healthcare, hospitality, and construction are still adding jobs at a steady pace, indicating that demand remains robust in key parts of the economy.

Moreover, consumers have also adjusted.

While higher prices have caused some to tighten their belts, spending has remained resilient, particularly in services and essential goods.

This spending power, backed by a strong labor market, has been one of the primary reasons the US economy has avoided a recession, even as other countries struggle with similar challenges.

What should investors watch for next?

Looking ahead, investors need to be prepared for several potential outcomes.

First, if the Fed continues with its expected rate cuts, we could see a continuation of rising stock prices, especially in sectors like tech and real estate. 

However, if the Fed is forced to slow or stop its rate cuts due to rising wages and inflationary pressures, markets could react negatively.

Additionally, global uncertainties—ranging from geopolitical tensions to energy prices—could impact the US economy in unpredictable ways.

For now, the labor market is strong, consumer spending is steady, and inflation is under control, but these factors are subject to change.

One possible scenario is that the US economy continues its current trajectory, growing steadily with manageable inflation. In this case, it makes sense for investors to stay invested in the markets and maintain a long-term outlook.

However, if inflation begins to creep back up and the Fed has to respond with more aggressive measures, volatility could return to the markets.

In that case, investors will be spooked and a chain-reaction like the one we’ve seen in early August is very much on the table.

The bottom line is that the US economy has proven itself to be far more resilient than many expected.

While this is encouraging, the economy’s unusual dynamics mean that caution is still warranted as we move into the final quarter of 2024 and beyond.

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The European Union has taken legal action against four of its member states—Spain, Cyprus, Poland, and Portugal—over their failure to implement crucial rules regarding global taxation for multinational corporations.

These nations were obligated to enforce specific tax regulations by the end of 2023, aimed at ensuring that large international companies pay a minimum tax rate of 15%.

This action stems from the EU’s efforts to harmonise tax practices across the bloc and close loopholes that allow corporations to shift profits to lower-tax jurisdictions.

The EU’s decision to sue these nations signals the seriousness with which it views this failure to comply.

While Spain has indicated its intention to rectify the situation soon, other countries remain slow to act, leaving them at odds with the EU’s broader efforts to create a fairer tax environment.

What led to the EU’s legal action?

The core issue lies in the failure of Spain, Cyprus, Poland, and Portugal to adopt the EU’s minimum tax directive, which aligns with the OECD’s global initiative.

The directive mandates that multinational corporations pay a minimum 15% tax on profits, ensuring that profits are not unfairly shifted to tax havens.

The rules were supposed to be in place by the end of 2023, and all member states were notified of this deadline.

However, these four countries have missed the deadline, failing to enforce and report the necessary legislative changes.

Spain, for example, has stated that it is already working towards compliance, with new legislation expected by the end of the year.

Despite this assurance, the European Commission’s legal action suggests that progress in Spain and the other countries has not been sufficient, leaving significant gaps in the bloc’s efforts to clamp down on tax avoidance.

What is the EU’s stance on global taxation?

The EU has long been a proponent of creating a level playing field when it comes to corporate taxation, particularly for multinationals.

The bloc has been instrumental in pushing for global tax reforms, working closely with the Organisation for Economic Co-operation and Development (OECD) to create unified tax rules.

The global minimum tax initiative is one of the most significant steps in this direction, designed to prevent companies from exploiting different tax regimes and to ensure that taxes are paid where profits are generated.

The Commission’s lawsuit emphasises the importance of uniform implementation of these rules across the EU.

By failing to adopt these measures, Spain, Cyprus, Poland, and Portugal are seen as undermining the collective goal of preventing tax evasion and ensuring fair competition within the bloc.

The lawsuit serves as a reminder that the EU will hold its member states accountable for their commitments to tax reforms.

What are the potential consequences for the countries involved?

The consequences for Spain, Cyprus, Poland, and Portugal could be severe if they fail to take immediate action to rectify the situation.

The EU has the authority to impose financial penalties and sanctions on member states that fail to comply with its regulations.

This could result in significant fines or other forms of punitive action that would further strain the countries’ relationships with the EU.

Spain’s pledge to enact new legislation by the end of the year may spare it from the harshest penalties, but Cyprus, Poland, and Portugal have not yet presented clear plans for compliance.

This raises concerns about potential delays and the impact on the broader EU tax strategy.

How does this affect multinational corporations?

The ongoing legal battle has significant implications for multinational corporations operating in the affected countries.

Companies that have been benefiting from the absence of a minimum tax may soon face new financial obligations.

The enforcement of the EU’s directive will likely increase their tax burdens, making it harder for them to shift profits to low-tax jurisdictions.

For corporations, the unpredictability of this legal situation may lead to uncertainty, especially for those with substantial operations in Spain, Cyprus, Poland, and Portugal.

What comes next for the EU’s tax reform efforts?

The EU’s decision to sue these four countries shows that it is serious about ensuring compliance with its global tax rules.

In the coming months, the European Commission will likely continue monitoring the situation closely, applying pressure on the nations to enforce the required laws.

If the countries do not take corrective action, the EU could escalate the legal proceedings, potentially resulting in more severe penalties.

The lawsuit also serves as a message to other member states: non-compliance with EU tax rules will not be tolerated.

As the EU continues to push for global tax reform, ensuring that all member states comply with these initiatives is crucial for the bloc’s credibility on the global stage.

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