Yellen still sees US jobs slack but also sees fast improvement; Draghi preparing for outright purchases of ABS; markets expect less from RBA or RBNZ

By Kymberly Martin

NZ Dollar

The NZD/USD ended the week just below 0.8410.

In a relatively quiet day of trading, the NZD/USD pushed up toward 0.8430 ahead of the US Jackson Hole meeting of global central bankers on Friday night.

Some broad USD strength followed Fed Chair Yellen’s address to the gathering. The NZD was a victim along with most of its peers.

However, from early Saturday morning lows close to 0.8380 the NZD/USD managed to claw its way back to end the week above the crucial 0.8400 level.

Despite some early-Saturday morning volatility, moves on most of the crosses were not particularly notable. The NZD/AUD ended the week a little lower around 0.9020.

The drift lower in the cross in recent weeks has been consistent with narrowing of NZ-AU interest rate differentials.

The market has reduced pricing of an RBA rate cut at the same time it has revised down its expectations of future RBNZ rate hikes.

However, we expect the NZ-AU 2-year swap spread that now sits around 135 bps will push back up toward 160 bps by year-end. This is one factor that should help some rebound in the cross in coming months.

It is a quiet start to the week locally with no scheduled data release on either side of the Tasman today. The domestic data calendar will kick off tomorrow with the release of the NZ trade balance and RBNZ’s July data on bank’s Loan to Value Ratios.

In the meantime, global geopolitical tension is likely to prevent a sharp resurgence in appetite for “risk-sensitive” assets such as the NZD.

We continue to see NZD/USD support at 0.8350 while resistance is eyed at 0.8440.

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

----------------------------------------------------------

Majors

The USD was broadly stronger at the end of the week. The AUD managed to marginally outperform.

Most markets traded fairly tight ranges ahead of the US Fed Chair, Yellen’s scheduled address at the Jackson Hole conference. Her speech didn’t come down firmly on one side of the fence or the other with regards to the current state of the US labour market. She did however reiterate her view that there is still “significant” slack in the labour market.

But she also explicitly referenced the possibility that “increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter”. Overall, the absence of a blatantly dovish bias helped push the USD index higher in the early hours of Saturday morning. It ended the week above 82.30.

The EUR/USD made a new cyclical low around 1.3220 after the Yellen comments. The move lower was partly reversed on the subsequent speech by ECB President Draghi.

This was a little surprising in our view, given his support for QE looks to have gone unconditional. He spoke of the ECB’s preparation for outright purchases of ABS. Perhaps the market had expected him to go further and directly reference Govt bond purchases. The EUR/USD clawed its way back from its lows and ended the week above 1.3240.

End of week CFTC data showed USD speculative long positions extended last week, to172.4k, from 145k the prior week. This was mostly due to an extension of the net EUR short position, to 138.8 K, from 126K previously.

This week starts with a Bank holiday in the UK. There are no key global data releases scheduled until tonight. In focus will be the German IFO business survey. In the US the August Services PMI and July new home sales data will be released.

All its research is available here.