By Stuart Talman, XE currency strategist
As expected, Friday's release of the Bureau of Labor Statistics jobs report was significantly impacted by Hurricanes Milton and Helene in addition to the Boeing strikes, the US economy adding just 12,000 jobs through October (vs 113K, expected) whilst the previous two months non-farm payrolls (NFP) data points were revised down by a total of 112K jobs. The unemployment rate remained at 4.1% whilst average hourly earnings surprised higher, climbing 0.4% (vs 0.3%, expected) month-on-month.
The market's kneejerk reaction saw US treasury yields and the dollar spiking lower, the 10-year note yield falling from above 4.30% through 4.23% whilst the dollar index (DXY) fell to a nine-day low, plunging through 103.70. Mostly range trading between 0.5960 and 0.5980 through the Asia session and the first half of European trade, the New Zealand dollar leapt by circa 30 pips to log Friday's highs a couple of pips shy of 60 US cents.
Marking the third occasion NZD/USD spiked into the 0.5990's during the past week, once again NZD bulls were unable to sustain upside momentum to propel the Kiwi higher to regain a foothold above 0.6000 as the market rapidly unwound the NFP-induced moves. Ultimately the Kiwi handed back all gains, falling around two-tenths-of-a-percent for the day to end the week a few pips below 0.5960.
Downside momentum shows no signs of abating as a momentous week ahead delivers the US presidential election and a widely expected 25bps cut at Thursday morning's conclusion of the FOMC meeting. Last week, we flagged 0.5962, the 78.6% Fibonacci retracement of the August-September surge as the near-term critical downside level that may halt the Kiwi's slide. Price action through each day last week oscillated either side of this mark, raising hopes for NZD bulls that NZD/USD may commence a basing pattern…..however Friday's modestly soft close supports further downside to start this week.
Shifting the focus back to the yield on the US 10-year note, the second half of US trade produced a swift reversal and decisive bullish run into the week's close, the yield climbing to within a couple of basis points of 4.40%, marking a fresh 3 month high. In turn the DXY ascended back through 104.30 and looks primed to re-test a significant 104.50/80 resistance zone.
The dollar's outperformance over the past 7 weeks has stemmed from the notable turnaround in longer-term US treasury yields, the inflection point evolving following the Fed's cycle commencing 50bps cut on 18 September. The stunning 80bps ascent is one of the most rapid seen following a Fed cut, catalysed by the strong run in US macroeconomic data that commenced in late August in addition to Trump regaining the (marginal) ascendancy in the election race. Whilst polls indicate the election is a coin flip, betting (probability) markets are suggesting a tight Trump victory.
The bond market is sending the message that further Fed easing in addition to a second Trump presidency could prove over-stimulatory and inflationary for the world's largest economy, requiring the Fed to dial back the speed of its easing cycle. Whilst there are many issues that influence voting trends, the performance of the US economy and more specially inflation, is this election's top issue.
Polling closes around 1pm, local time, Wednesday. Given the ultra-tight race, the result may not be known for a couple of weeks and will ultimately be determined by the outcomes in the battleground states of Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin. Political odds sight, FiveThirtyEight assigns a 52% probability of a Trump win, and a 48% probability of a Harris victory. Further, FiveThirtyEight assigns an 89% probability Republicans win the senate with the house a closer race, 53% in favour to Republicans.
A red wave, in which a Trump victory sees Republicans control the house and the senate would likely induce a fresh wave of USD buying, setting up a potential re-test of 2024 lows for the New Zealand dollar, around 0.5850.
It promises to be an action-packed week with heightened volatility.
Other events of note include the aforementioned FOMC decision, and other central bank meetings via the RBA and Bank of England, the latter also expected to cut by 25bps. Locally, Wednesday's 3Q employment report is the headliner. Other data points of note across the globe include the ISM Services PMI, trade balance across the Tasman, eurozone retail sales, Canadian jobs and Michigan consumer sentiment.
Given the wide range of potential outcomes for the week ahead, we will refrain from projecting a path for the New Zealand dollar which could well be either logging fresh 2024 lows or ripping back up through 60 US cents with conviction.
Stuart Talman is Director of Sales at XE. You can contact him here.
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