Equities fall following positive and above expectation US non-farm payroll data; first time this has happened since 2008

By Mike Jones

NZD

The NZD outperformed last week. After spending most of the week tracking sideways, brightening risk sentiment and chatter about M&A activity saw the NZD/USD bounce on Thursday. On Friday, upbeat US employment figures took some of the gloss off.

Still, at around 0.8250, the NZD/USD is pretty much smack in the middle of the 0.8100-0.8350 range that has contained the currency since mid-September. This period of range trading has coincided with a marked downtrend in currency and asset market volatility.

Not only have trading volumes been light, but Europe has been more settled, and global economic data has broadly aligned with expectations for a pick-up in global growth.

At 8.3%, one month NZD/USD volatility (traded in the options market) has fallen to the lowest level since 2004. The long-run average is around 13.5%. Excluding the GFC (where vols got to 40%), the average is around 12%. In summary, NZD volatility looks unsustainably low.

This week brings a packed schedule of news and events. Given this, we think there is a very good chance volatility begins to increase. Historically, rising NZD vols have been associated with a lower spot value.

In NZ, the Q3 HLFS labour market survey will be most closely watched. We’re looking for a 0.3% increase in employment which, with a flat participation rate, would be enough to bring the unemployment rate back down to 6.6% (from 6.8% in Q2).

This is a marginally better outcome than the 6.7% expected by consensus, and hence could see the NZD a little higher. Bear in mind that the HLFS data are notoriously volatile, and have elicited big NZD reactions in the past.

Tomorrow’s RBA decision is shaping up as a make or break one for the AUD. Market pricing is consistent with a 50/50 chance of a 25bps cut. Economists, including our NAB colleagues, are mostly in favour of a cut (15/20 in the latest poll). 

For the NZD/AUD, a rate cut would likely see a re-test of September’s 0.8060 highs. An ‘on-hold’ decision, however, could prompt a bigger reaction as markets are forced to unwind some of the 70bps of RBA easing still in the curve. The NZD/AUD would likely slink back towards 0.7900.

Alongside these local events, currency markets will also be watching the US election, policy decisions from the ECB and BoE, and the latest slug of Chinese data due at the end of the week.

For the NZD/USD, technical and momentum factors are now positive, meaning a topside test of 0.8100-0.8350 range looks likely. But given this week’s heavy event schedule, an increase in volatility is the only view we hold with any conviction.

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Majors

The USD strengthened and ‘risk-sensitive’ assets struggled following the release of Friday’s much stronger-than-expected US non-farm payrolls figures.

The 171k jobs increase was well above the 125k expected. Given this, the market reaction was surprisingly muted. The USD strengthened, led by a small bounce in the USD/JPY. Most of the majors (EUR, GBP, AUD) lost a small amount of ground in the wake of the stronger USD.

Oddly enough, US equities ended the night down 0.9-1.3%, the first time since 2008 this has happened following an above-expectations payrolls result. A dramatic sell-off in commodities markets appears to be responsible. Oil prices plunged almost 2.5% on Friday.

It’s an action-packed week ahead, with lots of event risk for currency markets. The real show stopper will be the US election on Tuesday.

The latest polls suggest it is too close to call, although betting markets clearly favour an Obama victory. We’ll likely see results begin to filter through from Wednesday morning Asian time. The consensus view is still that a Romney victory would be the more USD positive outcome. Certainly, a Romney victory would elicit the bigger market reaction given an Obama win has now been partially priced in.

Elsewhere, it’s a big week for central bank meetings. Policy announcements from the ECB, Bank of England, and RBA all due. Neither the ECB or BoE are expected to shift policy this time around, but the latest polls suggest they both may ease again in coming months.

The RBA will be far more interesting given markets view the decision as a roughly 50/50 call. A cut would likely further reinforce the familiar 1.0150-1.0410 AUD/USD trading range.

In contrast, an ‘on-hold’ decision would be consistent with a upside break out of this range, with the currency likely setting its sights on 1.0600.

There will be ongoing attention on Greece as the deadline for its next tranche of aid approaches. The Greek parliament votes on the latest batch of austerity measures on Wednesday. A failed vote would add to speculation Greece is headed for default mid month, weighing on the EUR and risk sentiment.

The G20 meeting that began yesterday runs through to tonight. We’ve already seen pressure on the US and Japan to sort out their fiscal cliffs. Chances are we see more headlines urging progress on the European debt crisis. These will be ignored.

Other News:

*Chinese services PMI rises to 55.5 in October, from 53.7 in Septmber.

Event Calendar:

5 November: AU trade balance & retail sales; CH HSBC services PMI; US ISM non-manufacturing; G20 meeting; 6 November: NZ LCI; AU RBA meeting; UK industrial & manufacturing production; EU German factory orders; US Presidential Election; 7 November: NZ RBNZ FSR; EU retail sales; 8 November: NZ HLFS; JN Current account; NZ consumer confidence; AU employment; UK BoE meeting; EU ECB meeting; 9 November: NZ ECT data; CH data slug; EU finance ministers seek agreement on 2013 EU budget.

All its research is available here.