By Stuart Talman, XE currency strategist
Following Friday's blowout jobs report, the market is now aligned with the Fed, abandoning its expectations for another 50bps cut at one of the two remaining FOMC meetings for the year.
Jobs growth in the US economy exceeded all estimates through September, nonfarm payrolls printing at 254,000, (vs 140K, expected) its highest level in 6 months. The prior two months' NFP results were upwardly revised by 72,000. Adding to the robust report, the unemployment rate fell from 4.2% to 4.1% whilst average hourly earnings increased 4% from a year earlier.
The report validates Fed Chair Powell's reasoning at the 18 September FOMC to commence the easing cycle with a half point cut, due to the rapidly improving inflation backdrop, rather than induced by concerns the target rate had been overly restrictive for too long, risking sending the US economy into recession. Friday's strong BLS employment report followed other impressive reads on the state of the labour market earlier in the week: the JOLTS Job Openings and ADP Employment Change data points comfortably exceeding expectations.
US treasury yields spiked higher following the jobs numbers as the market stripped out any expectations for a follow up jumbo cut at the 07 November FOMC meeting, assigning a near 100% implied probability Powell and his fellow Fed Governors opt for the standard increment. Likewise, the market now heavily discounts another 25 bps cut at the final meeting for the year, designating an 80%+ implied probability to a second quarter point cut.
The dollar extended its win streak across a fifth day, the dollar index (DXY) advancing over half-a-percent to close the week above 102.50, close to 2.5% higher from the 27 September swing low, a 14-month low. Last week marked the strongest weekly DXY advance in over two years and confirms the 27 September lows in the low 100.00's as a medium-term prominent swing low.
The dollar was stronger across the board with pro-cyclical currencies and the Japanese yen the noted underperformers, the latter the week's worst performer, falling over 4% on the mix of rising global yields and Japanese authorities expressing reluctance to add additional monetary tightening.
The New Zealand dollar was the second to worst performer amongst the G10 cohort, plunging close to 3% through the week, pulling back from 14-month highs a couple of pips shy of 0.6380 to end the week in the 0.6150's.
Having breached 0.6176, the 38.2% Fibonacci retracement of the August-September surge, the obvious downside target zone presents at 0.6100/20. Within, the midpoint of the aforementioned upswing is located as are the widely monitored 100- and 200-day moving averages.
Should NZD/USD fail to base around this zone, the lower half of the year-to date range: 0.5850 to 0.6050 comes into play.
US CPI and the RBNZ interest rate decision loom as the two key events in the week ahead that will influence short to medium term direction. Meeting on Wednesday, a 50bps cut from the RBNZ is favoured by the market, swaps pricing assigning a circa 75% implied probability the OCR is lowered to 4.75%.
Additional key event risk for the week presents via FOMC and RBA meeting minutes and eurozone retail sales. Developments in the Middle East will also be closely watched. A further escalation likely to induce safe haven flows, weighing on risk sensitive assets, including the New Zealand dollar.
Will a 50bps cut from the RBNZ send the Kiwi back below 61 US cents or will NZD/USD locate support in a critical 0.6100/20 zone?
Stuart Talman is Director of Sales at XE. You can contact him here.
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