Opinion: NZ$ strong above 67 USc; May fall if umemployment worse than expected

By Danica Hampton NZD/USD has spent the past 24 hours trading within a 0.6700-0.6770 range. Yesterday's surprisingly strong result from Fonterra's online milk price auction saw many investors bail out of short NZD positions (particularly in against the AUD). Heavy buying of NZD against AUD has been noted from a wide variety of accounts and NZD/AUD has climbed from around 0.7900 yesterday morning to nearly 0.8040 overnight. Along with solid demand for NZD/AUD, USD weakness also helped underpin the NZD/USD last night. Initially, it was the GBP/USD that led the USD lower "“ after upward surprises in the UK industrial production and services PMI. However, as the night progressed, the USD was further undermined by soft US data. The ADP employment report fell 371,000 (vs. 350,000 forecast) and the services ISM fell to 46.4 in July (well below the 48 forecast). Against a generally weaker USD, NZD/USD pushed above 0.6760. With employment reports due out both here and across the Tasman there should be plenty to keep an eye on today. Locally, Q2's Household Labour Force Survey (HLFS) is released at 10:45am. Our economists look for a 1%q/q drop in employment, which combined with a moderation in the labour force participation rate to 67.9%, will likely shunt the unemployment rate up to 5.7% from Q1's 5.0%. Across the Tasman, Australia's employment report for July is due at 1:30pm. The market is looking for employment to drop 18,000 in July and the unemployment rate to climb to 6.0% from 5.8%. For today, should NZ's unemployment report disappoint we could see NZD/USD come under a bit of selling pressure. However, we suspect dips in NZD/USD will be limited to 0.6650-0.6660 region. Some resistance is expected around 0.6760, but we continue to think a push higher towards 0.6800-0.6850 is likely in coming sessions. The USD weakened against most major currencies last night. While the USD Index climbed as high as 77.85 overnight, it is currently hovering around its 10-month low of 77.45. Early in the night, GBP/USD led the charge higher, bolstered by upbeat UK data. Industrial production rose 0.5%m/m in June, well above forecasts for a flat out-turn. Meantime, the services PMI chalked up its largest monthly increase in 1½ years, climbing to 53.2 in July. The recent string of upbeat data increases the chances of the Bank of England leaving its quantitative easing policies unchanged at this week's meeting (investors had thought it may increase its quantitative easing program). Solid demand for GBP/JPY helped push GBP/USD through stops in the 1.7010 region and the currency was squeezed up to 1.7042. Last night's US data was disappointing. The ADP index showed that 371,000 jobs were lost in July, a bit worse than the 350,000 forecast. This suggests some downside risks to Friday's US non-farm payrolls report. Meanwhile, the services ISM fell to 46.4 in July, this was well below forecasts of 48 and last month's 47. The services sector represents about 80% of US economic activity. Interestingly, while the soft US data took a toll on US stock markets and tempered risk appetite a touch, the USD remained weak. Instead of prompting "safe-haven' demand for USD, investors seemed to view the weak US data as an excuse to add to short USD positions. Against a generally weaker USD, EUR/USD climbed from sub-1.4360 to above 1.4440. This was despite relatively uninspiring Eurozone services PMI, which rose just 1 point to 45.7 in July. The recent Eurozone PMIs suggest the region's recovery is lagging that seen in both the UK and the US. We still believe that the Eurozone will need a weaker currency to kick-start any recovery, but the ECB's reluctance to ease rates further means any sell-off in the EUR will be dependent on events in the UK and the US. The focus will now shift towards the Bank of England and the ECB. Provided tonight's central bank decisions and Friday's US non-farm payrolls report don't dent investors' risk appetite and global recovery hopes, we suspect the USD will remain heavy in coming weeks. On the USD Index, near-term bounces will likely be limited to the 78.50 region. A break below the 10-month low of 77.45 will open up the downside towards 75.90-76.00. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.