Opinion: NZ$ falls below 71 USc ahead of key unemployment figures

By Mike Jones The NZD has spent the past 24 hours trapped in a 0.7060-0.7150 range. The NZD continues to take its cues from offshore. Currency markets were a little choppy overnight as markets continue to assess developments in the troubled European sovereigns Greece, Spain and Portugal. Early in the night, the NZD was buoyed by strong appetite for "˜growth-sensitive' currencies from model and technical type players. Combined with the strengthening GBP/USD (UK consumer confidence exceeded expectations in January), this saw NZD/USD squeeze up to an overnight high of nearly 0.7150. But the NZD/USD soon ran out of puff. Greece got a pat on the back from the EU Commission for its plans to slash its budget deficit below 3% by 2012. But the EU also imposed some pretty tough conditions on Greece in order to ensure its deficit targets are met. What's more, Portugal withdrew from a planned debt issue and Spain revised up its forecast budget deficit (to 9.8% of GDP in 2010), stoking fresh sovereign credit concerns. As a result, investors' appetite for risk quickly came off the boil, denting demand for the NZD/USD. Not only that, but some better-than-expected US data (ADP employment fell 22,000 vs. -30,000 expected) spurred modest gains in US interest rates and the USD. Accordingly, NZD/USD soon dribbled back to around 0.7070. Today's Q4 Household Labour Force Survey will set the tone for the NZD/USD this morning. While December's RBNZ Monetary Policy Statement estimated this to show a 6.6% jobless rate, from 6.5%, we are looking for a clear jump, to 6.9% (market consensus is 6.8%), based on a 0.3% fall in employment and the participation rate easing to 67.8%. Also keep an ear out for Australian retail sales, due out at 1:30pm. The NZD/USD is smack bang in the middle of its recent 0.6990-0.7150 range. While a downside surprise on unemployment could see NZD/USD test the bottom end of this range, Friday's US non-farm payrolls data is shaping up to be the next big test for the USD, and hence NZD/USD. Currency markets were a little whippy overnight. The net result is that the USD finished the night firmer against most of the major currencies. The night started out with a stronger GBP. Yesterday's upbeat UK consumer confidence data (73 vs. 70 expected) increased optimism about the UK recovery, and helped lift GBP/USD from a smidge below 1.6000 to 1.6060. Early gains in GBP paved the way for a weaker USD. Market chatter of sovereign and central bank selling of US dollars added to the pressure on the USD, such that USD/JPY dipped from 90.40 to nearly 90.10. The EU Commission's recommendations for Greece's austerity plan proceeded broadly as expected. The Commission backed Greece's plan to reduce its budget deficit below 3% of GDP by 2012, but laid out some fairly tough conditions including contingency reserves, and regular reporting starting from March. Market sentiment was initially cheered by the news. Greek bond spreads narrowed and EUR/USD poked its head above 1.4020. But initial optimism was later scuppered following news Portugal had cut a planned debt issue and Spain admitted its budget deficits over the next three years will probably be higher than forecast. Spain now expects the deficit to reach 9.8% of GDP in 2010. Risk appetite suffered as a result, having starting the night on a solid footing. The VIX index (a proxy for risk aversion based on implied S&P500 volatility) rose from around 21.3% to nearly 22.0%. Not only did lower risk appetite resuscitate demand for the USD, but last night's US data was a touch better than analysts had expected. In particular, the ADP employment report showed a 22,000 fall in jobs in January, against expectations for a larger (30,000) fall. 10-year US Treasury yields rose from 3.64% to around 3.67% accordingly. The stronger USD saw most of the major currencies end the night weaker. EUR/USD fell over 1 cent from above 1.4000 to around 1.3900 and USD/JPY soared to almost 91.20. Looking ahead, the markets' focus is firmly on US non-farm payrolls on Friday night. A 10,000 gain in employment is expected with whispers now circulating of a stronger number given last night's solid ADP employment result. As such, the USD should remain well supported for the rest of the week. Tonight, policy announcements from the ECB and BoE are due. No change in policy rates are expected from either. The BoE is expected to take a pause in its £200b asset purchase plan, while further plans to withdraw liquidity are likely from the ECB. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.