US employment report: NFP beats, but prior month revised notably lower. US treasury yields and the dollar fall, equity markets retreat, appear toppy

By Stuart Talman, XE currency strategist

Despite an upside beat in headline jobs growth, February's official US employment report was regarded as soft given the downside miss in average hourly earnings, the unemployment rate surprisingly higher and the prior month's non-farm payrolls (NFP) number revised notably lower.

The immediate reaction to Friday's Bureau of Labor Statistics data was a spike higher in US treasury yields and the dollar as the data reported 275K new jobs created, exceeding the consensus estimate of 190K and all but one polled economists' forecasts.

However, as the market digested the other components, namely wages growth falling from 0.5% to 0.1%, month-on-month and the unemployment rate climbing from 3.7% to its highest level in over two years at 3.9% (despite the participation rate remining steady), the knee jerk moves were unwound.

January's impressive NFP result of 353K was revised down to 229K, prompting the tin foil hat wearing cohort to declare that once again, the Biden administration was inflating the numbers.

Spiking through 4.13%, the yield on the benchmark 10-year note shed circa 10 bps to trade through 4.04%, its lowest level in over a month as the market subscribes to the view the Fed will commence lowering the target rate at the 12 June meeting. Prior to the data, swaps contracts priced in over 90 bps of accumulative tightening through 2024, climbing through 100 bps afterwards.

Interestingly, US equity markets gave up early session gains, failing to capitalise on the narrative that multiple Fed cuts are approaching, perhaps a sign that market participants are doubting the sustainability of AI-frenzy fuelled rally. 

The S&P500 declined -0.65%, the Dow -0.18%, whilst tech stocks lead the broader market lower, delivering a -1.16% intraday loss for the Nasdaq. It was only the third time since late October (a 19-week span) that the S&P500 and Nasdaq logged weekly declines falling -0.26% and -1.17%, respectively.

Rising steadily throughout Friday's Asian and European sessions, the New Zealand dollar set up to once again explore levels north of 62 US cents, having failed to establish a foothold beyond here in late February.

In the 15mins that followed the jobs data, NZD/USD dropped into the 0.6170's before ratcheting higher, marking intraday highs a couple of pips below 0.6220. Gains were pared through the second half of US trade as risk sentiment soured, the Kiwi ending the week a few pips below 0.6170.

Technically, the rejection of levels near 0.6220 suggests a double top may be forming should NZD/USD be unwilling to venture into the low to mid 0.62's, this week. Follow through selling through the first half of this week would validate the double top, returning the Kiwi to the midpoint of the prevailing 7-week range.

Fundamentally, this week's US CPI report looms as the key risk event to influence the market's short to medium term bias. Firm headline and core results, indicative of annualised inflation unwilling to fall below 3%, may prove dollar supportive as the market questions the need for the Fed to deliver a projected 3 x 25 bps hikes.

A light global economic calendar also delivers retail sales for the world's largest economy, a bounce in consumption expected due to the recent uptick in auto sales.

The dollar has been pushed into technical oversold levels with several of the majors appearing overstretched at two- or three-month highs, or in the case of the pound, GBP/USD ascending to 7-month highs.

Gaining +1.08% for the week, the New Zealand dollar was a middling performer on the G10 leaderboard. The yen, yet again outperformed, gaining over 2% versus the dollar as odds for a Bank of Japan hike at next week's meeting continued to firm.

Let's take a look at how the Kiwi faired against its major peers, starting with the yen…..

NZD/JPY • week-on-week change: -0.93% • year-to-date change +1.86%

Benefitting amidst speculation that BoJ Governor Ueda and his colleagues will deliver the first rate hike since 2007 and next week's BoJ meeting, the Japanese yen was stronger across the board. Multiple BoJ officials have implied the time is nearing to abandon the negative interest rate regime given price targets are nearing and the shunto wage negotiations (24 JAN. update provides an explainer) are expected to deliver the largest uplift in wages in around 30 years.

The yen also benefitted from US yields tracking lower, the US 10-year yield shedding circa 30 bps over the past few weeks.

Having ascended to a 9 year high through 93.40 in late February, NZD/JPY has declined close to 3%, meeting resistance at the upper bound of a rising trend channel that has supported bullish price action from July.

Falling through the mid-point of this channel last week to end the week below 90.80, a break below channel support, currently located in the low 89.00's likely confirms the February high as a major cycle high.

Today's fourth quarter GDP data and outcomes of the shunto negotiations will be the key events out of Japan, this week.

NZD/EUR • week-on-week change: +0.21% • year-to-date change -1.48%

At last week's meeting, the ECB, as expected, left all policy rates unchanged whilst modestly lowering eurozone growth and inflation forecasts. President Lagarde refrained from committing to the timing of the first cut, but via answers to journalists’ questions, implied a preference for June.

Multiple ECB officials also favour a summer cut.

The outlook for the eurozone economy has brightened in recent weeks as the macro data flow has improved, pushing back the projected start date of the ECB's easing cycle.

The Kiwi remains anchored near trendline support versus the euro, struggling to find a foothold above the convergence of the 100- and 200-day moving averages, both located between 0.5600 and 0.5630.

Price action has formed an ascending triangle pattern.

A break below 0.56, trendline support and the widely observed trend following indicators suggests further downside as 1Q draws to a close. Conversely a break of major resistance located in the mid 0.57's sees the re-emergence of topside momentum.

It’s a quiet week for eurozone data releases, CPI for Germany the sole tier 1 data point.

NZD/GBP • week-on-week change: -0.52% • year-to-date change -3.28%

The pound sustains its run as the strongest performing major currency, year-to-date, GBP/USD climbing close to 7% and the second strongest performer (+1.64%) behind the yen, last week.

Despite calls for the UK economy to stagnate through 2024, economic activity is yet to notably decline, whilst the jobs market remains tight. This week delivers the employment report - the average earnings component (wage inflation) the critical data point for the Bank of England.

Like the ECB, the BoE is expected to commence cutting around June.

The Kiwi remains pressured against the pound, NZD/GBP falling below the 200-day moving average and trendline support through last week. Marking lows a couple of pips above 0.4780, before closing the week a few pips through 0.4800, the pair looks to be setting up for another test of major support, located around 0.4770.

An upside surprise in UK wages growth looms as the obvious catalyst for NZD/GBP to continue its descent.

NZD/AUD • week-on-week change: -0.44% • year-to-date change +0.44%

Last week marked the Australian dollar's best weekly performance, year-to-date, AUD/USD advancing over +1.50%. Last week's result has bucked the trend for the Aussie, struggling amidst a falling iron ore price and weaker domestic macroeconomic data.

Rate cut expectations have been brought forward in recent weeks, with some analysts calling for the RBA to commence lowering the cash rate within the next few months.

Despite this, the Kiwi has failed to capitalise, NZD/AUD pulling back from major resistance near 0.9450 in late February. Closing last week a few pips above 0.9300, the pair remains entrenched in a 12-month range that has contained price action mostly between 0.9050 and 0.9450.

A quiet week for data releases across both sides of the Tasman, we suspect the pair trades either side of 0.9300.

So, given the light calendar, US CPI and retail sales should dictate this week's direction ahead of what presents as a pivotal week, next week - both the BoJ and Fed meets with the former expected to abandon its negative interest rate regime.

Upside CPI and retail sales beats will likely support a dollar turnaround whilst downside misses raise the likelihood the Fed cuts the target rate in June.

Will 62 US cents prove too high a hurdle for the New Zealand dollar to clear?

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