Very quietly lead into what will be a very interesting end to the year.

Every year, the week of Thanksgiving gives us calm before the (end of the year) storm, and this year is no different. Non-farm payrolls this Friday and then the December FOMC meeting will see this mammoth year-end with a bang. So, I want to ask a question:

What if the market is wrong? What if the idea that inflation will be back in its genie bottle by the end of 2023 is wrong? What if ‘slowing’ is slowing to half a notch rate rise and stays there?

Any of these will lead to a recalibration of the FX market, but don’t take our word for it. Just have a look at what the Reserve Bank of New Zealand did last week.

“Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen,” it said. This was the justification for increasing the official cate rate by 0.75 percent, its biggest single rate increase since it introduced a cash rate in 1999. It takes the official cash rate to 4.25 percent, and the bank is now forecasting the official cash rate will peak at 5.5 percent in the third quarter of 2023. It originally suggested the peak would be 4.1 percent as late as August.

Then there was this comment from Governor Orr “I think it would be fair to say the committee spent more time with 75 versus 100 than they did with 50 versus 75,” – that is not the language of ‘slowing down, nor is it the language that this hiking cycle is ending anytime soon.

The bank also believes that the New Zealand economy will fall into recession in 2023, not just for two consecutive quarters that constitute a technical recession, but in every quarter of the calendar year.

Again, this begs the question – what if the market is wrong and rates need to move harder and higher than forecast? Where does this leave pairs?

The short answer is moving to safety and moving to yield – this puts USD, CHF, and JPY in the frame for most flow in the interim, and that is despite the fact the USD has been king for almost all of 2022.

You only have to look at EUR/USD – the ECB has been strong on its views that rates will rapidly increase to counter the Eurozone’s inflation pair, yet the pair sits at $1.02.

The recovery in the likes of the AUD has stalled as the market asks the earlier questions – can the RBA really hold off and is Australia going to face the same dilemma as New Zealand?

AUD/USD at $0.66 is a strong, resistant level.