Markets see NFPs meeting Fed criteria for liftoff but fragile global markets weigh against it. Post-holiday open in China keenly awaited. NZD pushed lower

By Kymberly Martin

‘Commodity-linked’ currencies underperformed on Friday, led by the NZD. The JPY was the best performer.

Market sentiment remained fairly tentative on Friday night. Our global risk appetite index (0-100%) remains at a relatively fragile 25% and commodity prices have declined further.

The CRB global commodity index pulled back from its recent rebound, by 0.9% on Friday. This backdrop provided little support for the NZD and AUD.

However, the bigger currency moves came after the release of the long-awaited US payrolls report.

US August non-farm payrolls came in some way below consensus, at 173k. However, there were upward revisions to the previous two months’ data, taking both to 245k. The US unemployment rate also fell to 5.1% from 5.3%. This puts unemployment rate in the middle of the FOMC’s 5.0-5.2% estimate of the long-run equilibrium rate. The FOMC has therefore achieved the “full employment” component of its dual mandate. Average hourly earnings also ticked up by 0.3%, to be up 2.2% y/y.

The US labour market appears to have shown “some further improvement”, one of the US FOMC’s preconditions for commencing policy normalisation. US growth is running ahead of the Fed’s projections in June and the unemployment rate has fallen more rapidly than it anticipated.

But global financial markets are clearly also more fragile. With a lot to digest currencies were highly volatile immediately post the data release. However, within a few hours the USD had returned to trade at pre-release levels.

The JPY also suffered a bout of volatility, but was the overall winner on the night, given generally subdued risk appetite. The USD/JPY ended the week at 119.00.

The NZD/USD experience d a brief spike higher after the release of the US payrolls report. However, this proved very short-lived. It later slipped below previous support levels to end the week at 0.6285. CFTC data, released at the end of week, showed speculative short positions in NZD had extended to 8.3k from 6.1k (as of 1 Sept).

On the crosses, the most notable move was for the NZD/JPY. In a classic ‘risk-off’ trade the cross fell around 2.8% over the course of Friday. The NZD/JPY ended the week at 74.70.

Official comments from the G20 meeting in Ankara remained fairly cautious on global growth, although the group maintains “confidence that the global economic recovery will gain speed”. However, IMF head, Lagarde, sounded less confident saying; ”growth is too low, productivity is too low, trade numbers are too low, investment is too low, infrastructure projects are too few and the only thing that is too high is unemployment”.

On currencies, it appears the Chinese authorities managed to convince most of the G20 group that its devaluation and new currency management arrangements were a step on the road to a more market-determined exchange rate.

The re-opening of the Chinese equity market this morning will have a huge influence on general market sentiment. Otherwise it is a relatively light local data calendar and the US tonight celebrates Labour Day.

Kymberly Martin is on the BNZ Research team. All its research is available here.