NZD traded in a tight range apart from some volatility around the US payroll data, closing at 0.7280 USD; US payroll data stronger than expected, signalling robust economic growth; UK data weaker than expected, lowers rate hike expectations

By Jason Wong

Friday’s focus was the US employment report but other factors stole the limelight, with CAD, GBP and JPY the biggest movers on the day. The global bond market sell-off continued, but this didn’t perturb US equities, with the strong payrolls report signalling robust economic growth.

The 222k increase in US non-farm payrolls for June was stronger than expected, with upward revisions, but wage inflation remained well under control and the 2.5% annual increase was slightly weaker than expected.  The strength in employment was seen to encourage the Fed to continue along its guided path of policy normalisation, which saw yields nudge higher.  The 2-year rate closed less than 1bp higher at 1.40% while the 10-year rate ended the day up 2bps at 2.385%, its highest close in four weeks.  The market reaction for the USD was modest as well, with the major currency index closing flat for the day.

Canada’s employment report had more impact on the market, with strong employment growth cementing in expectations for a hike this week.  The OIS market prices in a 95% chance of a 25bps hike to 0.75%, which would officially make the Bank of Canada the second major central bank to kick off a tightening cycle.  USD/CAD fell 0.8% to 1.2875, a 10-month low.  NZD/CAD is down to 0.9370.

At the other end of the scale, a series of UK economic indicators were all weaker than expected – industrial production, construction and trade – driving GBP down 0.6% to 1.2890 and NZD/GBP up to 0.5650.  More data like these would dampen down market expectations of a possible BoE rate hike later this year and push out the timing to early next year.

The yen lost ground after the BoJ stepped in to prevent JGB yields from rising any further during the current global bond market sell-off.  It offered to purchase unlimited bonds at a fixed-rate auction. While the offer of 0.11% for the 10-year rate wasn’t attractive relative to prevailing market pricing and found no takers, it signalled the bank’s resolve to anchor the JGB yield curve.  USD/JPY ended the day up 0.6% to 113.90.  NZD/JPY broke up through 83, a 6-month high, and closed the week just under that level.

The NZD traded in a tight range apart from some volatility just after the US payrolls report and ended the day fairly flat at 0.7280.  It looks like the NZD is facing headwinds after the strong mid-May to mid-June recovery.  The NZD has tracked sideways in a USD 0.7200-0.7350 range for the past few weeks now.  We see more chance of a break to the downside than the upside over coming months as the US dataflow improves.  Positioning data for the period to early last week showed the highest number of net long NZD speculative positions in four years, with a notational position of over $2.1bn.  This skews the near term risk to the downside on any negative news for the currency.

EUR struggled to push on beyond 1.14 despite data highlighting the strength of the euro-area’s economic recovery, with industrial production beating expectations in Germany, France and Spain. 

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