NZD rises getting boosts from poor US payrolls report, better EM prospects, and improving AU confidence

by Kymberly Martin

NZ Dollar

The NZD/USD has benefitted from a general improvement in risk appetite, and more specifically from a soft USD on Friday night. It ended the week close to 0.8300.

Generally, risk appetite has begun to return to markets as emerging market ructions have moved out of the spotlight, as e.m. currencies have stabilised.

Our risk appetite index (scale 0-100%) that bottomed at 39% last week, now sits at 59%. This has helped appetite for ‘risk sensitive’ currencies such as the NZD return, at the expense of currencies such as the JPY. The NZD/JPY has rebounded from below 82.00 to almost 84.90 in recent trading sessions.

The NZD/USD was further boosted on Friday night, by USD weakness following a disappointing January US payrolls report. This saw the NZD/USD gap from around 0.8240 toward 0.8300, where it ended the week.

The NZD also strengthened relative to the AUD at the end of the week. The NZD/AUD closed at 0.9260.

With a relatively low-key data week domestically (with the exception of Thursday’s NZ PMI) it will likely fall to AU data to be the driver of the cross this week. The key to Tuesday’s NAB business survey will be to see if it can sustain after AU business conditions rose to a 2 ½ year high in December. Thursday’s AU labour market report is expected to show the unemployment rate rising to 5.9% from 5.8%. This is in stark contrast to the improving trend shown last week in the equivalent NZ report. With NZ’s unemployment rate now at 6.0% we are close to the point where these two trends will bisect.

Still, we feel this story of contrasting fortunes on either side of the Tasman is now well known and accounted for in the cross. We continue to see 0.9500 as the cyclical peak on the NZD/AUD. We see the NZD/AUD trading in the low 90s in H1, which is still some way above fundamental ‘fair value’.

For today there are no domestic data releases. We anticipate NZD/USD resistance approaching 0.8350. Support is eyed at 0.8250 ahead of 0.8210.

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Majors

The USD index lurched lower after the release of a disappointing US payrolls report on Friday night. The JPY was the only currency to underperform the USD.

Currencies traded fairly tight ranges in anticipation of the US payrolls report early on Saturday morning (NZT). The January data disappointed at 113k (180k expected). The weakness cannot be blamed on weather issues as it could in December, so the data showed genuine softness. The unemployment rate nevertheless fell from 6.7% to 6.6%. This is within a whisker of the 6.5% level the Fed has used to highlight when it might reconsider its Fed funds target rate.

The Fed is likely therefore likely to stay its course of gradual ‘tapering’ of asset purchases.

The USD index ended the week below 80.70 from 81.30 at the start of the week. The JPY was the only major to underperform. As risk appetite has improved in recent days, with fading emerging market turmoil, it has lost its ‘safe haven’ allure. The USD/JPY suffered severe volatility around the release of the payrolls report but ended the week higher at 102.30.

The other big news on Friday was that Germany’s Constitutional Court refused to strike down the legality of the ECB’s Outright Monetary Transactions (OMT) programme put in place (but not used, as yet) during the height of the Eurozone crisis. The court said it doubted the legality of the OMT but deemed itself powerless to impose a veto, instead referring the matter up to the European Court of Justice. However, the EUR/USD was a beneficiary of post-payrolls USD weakness along with its peers. It ended the week at 1.3640.

The AUD/USD ended the week a little higher at 0.8960. Friday’s IMM data showed speculative AUD short positions had been trimmed by some 10k, now -55.5k from -65.7k previously. After last week’s RBA meeting, and the Bank’s move to a ‘neutral’ stance, the market now prices only a 10% chance of a further cash rate cut. This week, the key releases for the AUD will be tomorrow’s NAB business survey and Thursday’s employment report.

It will be a quiet start to the week offshore with little data scheduled today except Japanese balance of payments.

All its research is available here.