By Mike Jones
Yesterday’s Q2 Household Labour Force Survey (HLFS) was a dead set clanger. It was unequivocally weaker than we, the market, and the RBNZ expected.
Unemployment jerked back up to 6.8% (from 6.0% in Q1) and employment slipped 0.3%. It was yet another reality check for those expecting a rapid return to above trend growth for the NZ economy. Some heat was taken out of the NZD accordingly. NZD/USD dived ½ cent to below 0.7300, and NZD/AUD slipped to 3-month lows below 0.7950. However, the further 5-10bps softening in NZ swap rates plumbs them to levels that are now even harder to justify on any reasonable view on the economy.
We still see enough to justify the economy looking noticeably better in 6-18 months’ time, with next to no spare capacity. A further 2½ OCR hikes, as is currently priced by the market, just doesn’t look like enough under this scenario. Overnight, currency markets were happy to tread water, as traders countdown to tonight’s all important US non-farm payrolls data. Still, ongoing willingness from short-term speculative and leveraged accounts to add to NZD/AUD short positions kept NZD/AUD rallies limited to 0.7970, and ensured NZD/USD took out the title for weakest performing currency overnight.
Looking ahead, we’re still not convinced the NZD/USD is ready to roll over. The simple fact is that USD weakness is the dominant driver of currency markets at present, a trend which is tending to float all boats. For near-term clues on the outlook for the USD, tonight’s US employment report will be important. Further evidence of slack in the US labour market would only add to fears the US economy is shifting into a lower gear and additional stimulus from the Fed is required.
Under this scenario, the USD would slide further and NZD/USD could re-test resistance towards 0.7350. Conversely, a better-than-expected payrolls print would soothe fears about a US “double-dip”, which would set NZD/USD on a path back towards 0.7200.
Majors
Overnight movements in currency markets were relatively lacklustre.
With Friday night’s US non-farm payrolls figures looming large, most investors were content to spend the night on the sidelines. The USD index spent the night trapped in a sideways 80.50-81.10 range. As we flagged yesterday, policy announcements from the Bank of England and ECB provided little to no excitement for markets. As widely expected, both kept their key policy rates unchanged, at 0.5% and 1% respectively.
Despite the recent spate of more positive news, ECB President Trichet toed a surprisingly cautious line, highlighting the considerable uncertainty that pervades the European outlook. Nevertheless, EUR/USD managed to grind higher. EUR sentiment was buoyed by a successful Spanish bond auction (borrowing costs fell 100bps relative to the June auction) and a vote of confidence from the IMF in Greece’s fiscal austerity programme. Upbeat German factory orders (+3.2%m/m in June vs. 1.4% expected) and real money demand for EUR/GBP also added support.
From around 1.3160, EUR/USD climbed to nearly 1.3230, before eventually settling lower. In the US, sentiment was soured by yet more data highlighting the shaky outlook for the US labour market. Jobless claims jumped to 471,000 for the week ending July 31 – the highest since early April and well above forecasts for 455,000. US stocks fell 0.2-0.3% and 10 and 2-year bond yields slipped around 5bps. USD/JPY plunged from 86.20 to nearly 85.80 in the wake of the softer data.
However, the overall USD damage was limited by a mild squaring of USD short positions ahead of tonight’s non-farm payrolls data.
The CAD was able to continue its recent strong run after an apparent endorsement from the Canadian government. Finance Minister Flaherty said the rise in the CAD “makes sense” given growing demand for Canadian assets.
USD/CAD dived to 3-month lows below 1.0120, before succumbing to the late strengthening in the USD. Tonight’s non-farm payrolls data for July will provide a crucial test on whether markets’ renewed pessimistic towards the US economy, and hence the USD, is justified. Expectations are currently centred around a 65,000 employment drop, and a tick up in the unemployment rate to 9.6%. We suspect a result on or above expectations would see the USD index test resistance towards 81.40.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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