Economic data releases have been a key driver of currencies over the past 24 hours, with NZ labour market data driving the NZD lower, and strong releases driving the USD and GBP higher.
During the local trading session, a surprise lift in NZ’s unemployment rate and weak wage data drove a weaker NZD and lower rates, with the NZD falling from 0.7340 down to 0.7265 by the local close. The currency tried to recover last night but didn't quite make it back up to 0.73, as stronger than expected US ADP employment and ISM manufacturing data drove the USD higher.
The NZD has fallen back down to around 0.7250. If not for the FOMC announcement ahead at 8am, the NZD might have fallen further, with traders reluctant to put on fresh positions ahead of that event. That announcement will set the scene for the day ahead. We expect little change from the December Statement, perhaps a slightly firmer tone at the margin. The Fed will want to keep its options open as it looks to raise rates three times this year. The messaging of a gradual tightening pace, dependent on upcoming data, should prevail.
The USD major currency index is up about 0.4%. Following Trump's trade advisor Peter Navarro's accusations against Germany, Japan, and China on deliberately manipulating their currencies lower, Germany and Japan's PM have come out fighting, defending their position. We think that Germany and China's positions are defensible. Germany has been calling for tighter ECB monetary policy but has been outvoted, while China has been manipulating its currency higher, not lower, over the last couple of years. Japan, on the other hand, has been keen to see the yen devalue even though it remains very cheap by global standards.
GBP is the strongest of the majors, supported by UK PMI data that were as strong as expected, but with the cost index rising to the highest level since the survey began in 1992, no doubt a reflection GBP's sharp depreciation post the referendum. This data comes ahead of tonight's BoE meeting, which could show stronger growth and inflation forecasts. The BoE is expected to show unchanged policy, with an outside chance of a split vote if more hawkish members vote to curb the August stimulus package.
GBP/USD is up 0.5% to 1.2640, now significantly higher than the 1.20ish level seen only a couple of weeks ago ahead of PM May's “Grand Britain” speech on Brexit. Combined with a softer NZD, NZD/GBP has fallen to 0.5735.
The AUD faced some resistance around the 0.76 level and currently sits at 0.7560. NZ's soft labour market data sees NZD/AUD back below the 0.96 mark. We see the cross trading largely within a 0.94-0.97 range over coming months.
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