Bond yields notably lower for a third day, US 10-year yield dips below 4.50%. Soft US jobs report: 150K jobs & 3.9% jobless rate; stick a fork in the Fed. ISM Services PMI falls to lowest level in 5 mths; data flow turning

By Stuart Talman, XE currency strategist

With the release of both the US employment report and the ISM Services PMI, Friday's US session was expected to deliver lively price action. 

Expectations were surpassed.

US treasury yields and the dollar were pummelled following softer than expected jobs numbers and services sector activity for the world's largest economy falling to its lowest level in 5 months.

Rejecting the 5% mark the week prior, the yield on the benchmark US 10-year bond plunged through 4.50% during US trade before ending the week around 4.57%, circa 30bps below the previous week's close. 

The remarkable lift-off in longer dated yields that had underpinned US dollar strength through September and October has ended as the market subscribes to the view the Fed is done hiking. Last week's ISM Manufacturing and Service PMI misses in addition to jobs growth falling from 297K to 150K, suggests the run of robust macroeconomic data is nearing an end as 500bps of cumulative monetary tightening filters through the US economy.

Logging an impressive intraday gain of +1.71%, the New Zealand dollar was the second strongest performer amongst the G10, climbing from below 59 US cents to mark Friday's high a pip or so through 60 US cents.

It’s the highest the Kiwi has traded since 12 October. On that day an upside US CPI beat crunched NZDUSD below 0.60, opening a path for the pair to fall to its 26 October year-to-date low a few pips above 0.5770.

We had been on basing watch, commenting throughout last week that the Kiwi must clear a 0.5840/80 resistance zone to shift the short-term bias from negative to neutral.

For the first half of the week the Kiwi failed to punch through, however following Powell's FOMC presser on Thursday morning in which the Fed Chair would not commit to a year-end hike (via comments dismissing the SEPT. dot plot), a path opened, NZDUSD reclaiming territory north of 59 US cents.

Briefly dipping back below 0.59 during the early Asian afternoon, the Kiwi was bid through 0.5920 shortly before the release of the US labour market data. Jobs growth at 150K (vs 180K expected), in addition the previous two months' downward revisions was accompanied by the unemployment rate ticking higher to 3.9% (vs 3.8%, expected) and average hourly earnings falling from 0.3% month-on-month to 0.2% (vs 0.3%, expected).

The Kiwi catapulted, ripping higher by ~60 pips immediately following the data, before consolidating gains through the New York afternoon, ending the week in proximity to the highs, closing a few pips below 60 US cents.

For the week, the New Zealand dollar was the strongest performer amongst the G10 cohort, climbing +3.18%. It was the largest week-on-week gain for the Kiwi since October 2022, similarly a period when NZDUSD rebounded from then, cycle lows.

In the 8 weeks that followed the 2022 October lows, the Kiwi rallied over 18%.

Will the Kiwi go on a similar run as we round out 2023?

Seasonals would support a stronger Kiwi through the final two months as risk-sensitive assets typically perform well at this time of year as economic activity across the globe steps-up into the lead up to the festive season.

Should jobs numbers and other macro data out of the US continue to soften, the dollar, in turn will continue to pullback from its October swing high.

However, we caution against expectations for a deep dollar protraction.

Powell made it clear in his FOMC press conference that he and his Fed colleagues are not thinking about rate cuts, instead continuing to question if the Fed funds target rate is sufficiently restrictive.

Inflation (as measured by core-PCE) still remains around double the Fed's target and in recent months has slowed the pace of decent.

Geopolitical tensions in the middle East threaten to squeeze oil supply should the Israel-Hamas conflict develop into a wide-spread regional war. Surging energy prices heading into the Northern Hemisphere winter could plunge the global economy into recession, inducing the dollar's safe haven bid.

Despite last week's pronounced down surge, it's far too premature to declare an end to the ascension for longer dated US bond yields. The Fed's higher for longer psyche, the approaching end to the BoJ's easy monetary policy settings and the US Treasury's ongoing debt issuance will ensure treasury yields retain an upside bias.

China also looms as the canary in the coal mine. 

The prevalence of these storylines would support a higher US dollar, or at the very least a dollar that does not cede too much upside. 

Looking to the week ahead, it's a quieter economic calendar relative to last week's unrelenting schedule. Regionally, the headline event is tomorrow's Melbourne Cup day meeting for the RBA, market pricing split between a fifth consecutive on-hold decision versus a 25bps cut to 4.35%.

Also on the radar, the RBNZ's 4Q inflation expectations, eurozone retail sales, UK GDP, CPI for China, UK GDP and Uni of Michigan consumer sentiment.

A busy week of Fed-speak is headlined by Fed Chair Powell's speech, overnight - Wednesday.

Following last week's stonker of a rally, the focus remains on upside levels for the Kiwi. The 11 October swing high at 0.6056 in addition to the 100-day moving average (currently at 0.6022) present as key hurdles for NZDUSD to clear to extend higher.

On the downside, old resistance located near 0.5920 forming new support would increase the likelihood the 26 October low remains unchallenged as the year concludes.

It will be interesting to observe this week's price action to determine if last week's dollar decline was overdone or if we have entered into a new, softer phase.

Stuart Talman is Director of Sales at XE. You can contact him here.