By Stuart Talman, XE currency strategist
Risk sensitive assets continue to perform well ahead of this evening's Bureau of Labor Statistics (BLS) official employment report for the US economy, consensus estimates calling for around 180K new jobs (NFP) and the unemployment rate to remain steady at 3.9%.
The market appears to be positioned for a soft report following both JOLTS Job openings and ADP Employment change data both undershooting expectations earlier in the week in addition to last month's softer BLS report.
Following a rip-roaring rally through November as treasury yields plummeted on the view the Federal Reserve has ceased raising the target rate, US equity markets have consolidated gains through the first week of December, seemingly poised for a breakout.
In which direction could be may well be determined by this evening's jobs numbers - a modest downside NFP miss, its likely off to the races for risk assets, the S&P500, Nasdaq and Dow catapulted through all-time highs that were achieved in late 2021 (Nasdaq) and early 2022 (S&P500, Dow).
Gaining around half-a-percent through Thursday, the New Zealand dollar has mostly ranged between 0.6120 and 0.6170, recovering from a sluggish Asian session following the release of China trade data.
Encouragingly exports for the world's second largest economy climbed into positive territory for the first time in 7 months, suggesting a step-up in offshore demand, however imports were soft, falling -0.6% (vs +3%, expected). It's the 10th time this year that imports have contracted, indicative of fragile domestic demand despite a swathe of fiscal stimulus initiatives aimed at boosting consumer confidence and consumption.
It was a similar outcome across the Tasman, trade balance data for the Australian economy in November recording a 0.4% rise in exports (up from -1% in OCT.) whilst imports unexpectedly declined -1.9% (vs +8%, expected), delivering a smaller than expected trade surplus.
Following an impressive rip higher, NZDAUD eased back from recent swing highs near 0.9380, falling to within a couple of pips of 0.9340 at Thursday's lows.
The major news story from the past 24 hours has been the huge moves in Japanese bond markets and the yen, JGB yields, and the JPY propelled higher by comments from BoJ Governor Kazuo Ueda and one of his deputies, Ryozo Himino.
Speaking before parliament, Himino discussed the impact of negative rates, expanding to comment that households would benefit from a shift to positive rates, adding that there would be a sufficient possibility of achieving a positive outcome from the exit, since a wide range of households and firms would benefit from the virtuous cycle between wages and prices.
The comments added to speculation the BoJ will deliver a widely anticipated pivot to normalising monetary policy settings by abandoning its yield curve control (YCC) policy and hiking the main policy rate back into positive territory for the first time since 2016.
Governor Ueda added to the speculation via his thoughts on monetary policy, stating that maintaining current settings would become even more challenging from the year-end and heading into next year.
Prior to the BoJ Governors' comments, the market assigned an immaterial implied probability of a rate hike at the 19 December BoJ meeting…..now this has ratcheted up to near 40%.
In turn, JGB yields soared, the 10-year leaping from 0.67% through 0.77% - a huge move given YCC continues to administer a 1.00% cap. In turn the JPY took flight, USDJPY plunging from an intraday high near 147.30 through 142.00 before settling to commence Friday's local session near 143.50.
We have been here before.
Officials from the BoJ and Ministry of Finance jawboning, implying an upcoming tweak to policy settings……and then, no action follows.
As has been the case in recent weeks, the market has gotten ahead of itself: in the case of the Fed, being too aggressive with 2024 rate cut pricing and regarding the BoJ, too hasty to price in an exit from the negative interest rate policy regime.
Consensus amongst the analyst community predicts a YCC exit and rate hike sometime in second quarter, 2024.
Last week's NZDJPY swing high through 91.50 was an 8½ year high.
Thursday's circa 2% rout drove the pair below 88.00 before losses were pared, NZDJPY commencing Friday's local session near 88.60.
We suspect the pair will rebound back through 90.00 as the outcome of the December BoJ meeting fails to align with market expectations.
To the day ahead, the main event is the BLS employment report. Attention will also be given to 3Q GDP for Japan, German CPI and the preliminary reading for Uni of Michigan consumer sentiment.
A soft jobs report, NZDUSD finishes the week above 62 US cents, whilst an upside beat on jobs growth sends the pair back towards 61 US cents, igniting a risk-off wild-fire.
Stuart Talman is Director of Sales at XE. You can contact him here.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.