The NZD heading up and 'a fairer price in a world where risk appetite remains solid and commodity prices remain on an upward path'

By Jason Wong

The key focus on Friday was the US employment report, which made for a quiet trading period ahead of its release. 

It ended up being a mixed report, with employment growth in line with expectations, but the unemployment rate dropped by a chunky 0.3% to a 9-year low of 4.6%.  Just as surprising was much weaker wage inflation, with average hourly earnings down 0.1% m/m.

US rates and the USD fell after the report, with the major currency TWI down 0.3% for the day, capping off a soft week, down 0.9%. 

After the strong post-Trump rally it’s clear that a bit more two-way flow has returned to the USD and we expect it to show further signs of consolidation into year-end, before the upward trend returns.

The biggest gainer on Friday was GBP which gained steadily throughout the day and ended up 1.1% higher at 1.2730.  This followed news that the anti-Brexit Liberal Democrats won a London by-election, which reduces PM May’s already-slim majority by one.  Another by-election is scheduled later this week.  It adds to the view that a soft-Brexit outcome has become more likely than a hard-Brexit.  A lift in Markit’s PMI construction index to an 8-month high did no harm to GBP either.

The NZD finished the week around 0.7140, up 0.7%.  We recently noted that the NZD had become “over-sold”, and our model suggests that the 0.72 handle is a fairer price in a world where risk appetite remains solid and commodity prices remain on an upward path.

NZD/AUD tested the 0.96 mark for the third day in a row but again fell short of this area of resistance.  This marks the top of the trading range the cross has been in over the past couple of months.

EUR ended the week on a flat note at around 1.0665, ahead of the weekend’s Italian referendum on the constitution and Austrian Presidential election.  This morning, the far-right candidate Freedom Party’s Hofer has conceded defeat to Independent candidate Van Der Bellen, which is slightly positive for EUR.  Italy’s referendum results might become clearer later this morning, where a “No” vote is expected to edge out “Yes”, which would be EUR-negative.

USD/JPY’s move down to 113.50 was aided by the fall in US Treasury rates.  The cross has been closely correlated with the US 10-year rate since Trump’s victory.

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