NZ$ slides after jobless rate rises to 6.8%; BNZ economists push out OCR hike view to Sept from June
4th Feb 11, 8:27am
by
By Mike Jones*
As anticipated, NZ labour market data released yesterday proved to be the key driver of the NZD/USD over the past 24 hours. The Q4 unemployment rate, which was expected to hold at 6.4%, surprised negatively at 6.8%. The NZD/USD plunged over ½ a cent on the release to around 0.7720, a level it traded around all night.
The Q4 labour market results weren’t as bad as they looked. Nonetheless they were still weak enough – and enough of a surprise – to suggest the Reserve Bank will need more time to be sure of the economic pick-up it forecasts, before it lifts its cash rate any further.
As a result, we have pushed back our expectations for an OCR hike to September, from June, having been waiting for a clear justification to do so. This represents a shift in timing as opposed to a fundamental shift in view. The employment data does little to alter our general story; of GDP growth getting a lot of traction through calendar 2011, with inflation becoming more of a threat than many expect.
Our OIS model suggests the market now ascribes just a 50% chance of an OCR hike in July, with a hike not fully priced until October. We still expect a gradual progression of rates hikes toward a peak of 5.00% in September 2012.
By contrast, our model suggests the Fed is not expected to start hiking rates from close to 0%, until well into Q1 2012. The relative trajectory of NZ/US monetary policy will continue to be a key driver of NZD/USD over the medium term. Tonight’s US January non-farm payrolls will provide useful information in terms of the US trajectory.
Elsewhere, the NZD’s most significant move was a rise against the EUR overnight. ECB President Trichet’s comments at the ECB monthly news conference disappointed market expectations of more hawkish rhetoric. The NZD/EUR rose from around 0.5600 to above 0.5660 accordingly.
For today, we see support for the NZD/USD on dips towards 0.7680. Resistance is eyed around 0.7820.
Majors
Most of the major currencies weakened against the USD overnight. The EUR/USD led the losses, plunging sharply after ECB rhetoric failed to live up to the market’s hawkish expectations.
The ECB left its key policy rate unchanged at 1%, as expected. President Trichet duly noted the “evidence of short-term upward pressures on overall inflation”, but talked down the implications for ECB policy, noting “price developments will remain in line with price stability”.
The less hawkish comments came as an obvious disappointment to a market that had become preoccupied with the prospect of early ECB rate hikes. Two-year German bond yields slipped 11bps to 1.34% in the wake of the statement, helping drag the EUR/USD from above 1.3750 to closer to 1.3650. Eurozone retail figures data added to the EUR’s woes, falling 0.6%m/m in December, in contrast to the market’s +0.5%m/m expectation.
Not only did sharp losses in the EUR help prop up the USD overnight, but further modest gains in US bond yields added a layer of fundamental USD support.
More good news on the US economy came in the form of a surprisingly strong ISM non-manufacturing index (59.4 vs. 57.2 expected), lower than expected jobless claims figures (415k vs. 420k expected) and a small gain in December factory orders (0.2%m/m vs. -0.5% expected). In response, 2-year US Treasury yields pushed up 4bps to around 0.70%, to be up nearly 15bps for the week.
Against the broadly stronger USD, GBP/USD skidded from 1.6260 to around 1.6130, having earlier been sent soaring by an upbeat reading of the UK services PMI (54.5 vs. expectations of 51.3). USD/CHF climbed from 0.9400 to almost 0.9500 and USD/CAD ticked up to 0.9920, from 0.9870 earlier in the night.
The AUD shrugged off the broadly stronger USD overnight, taking out the title of strongest performing currency in the process. Not only did cyclone Yasi prove less damaging than expected, but a slew of upbeat Australian data yesterday (December building approvals and trade balance) bolstered RBA rate hike expectations (a total of 30bps of tightening is now expected over the next 12 months).
From around 1.0100, AUD/USD climbed to end the night around key resistance at 1.0150.
Looking ahead, all eyes tonight are on US non-farm payrolls for important USD direction. Analysts expect 145k jobs were added in January. Should employment exceed expectations, watch out for further gains in US bond yields and the USD.
Mike Jones is part of the BNZ research team.
All its research is available here.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.