USD falls to a one-month low, now down 1% since Powell's Jackson Hole speech. NZ 10-year bond spread to Australia reaches fresh 5½ year high

Markets have been relatively quiet overnight as investors wait on the US nonfarm payrolls report tonight.  The USD has continued to decline, hitting a one-month low overnight.  The NZD has outperformed, breaking above 0.71 overnight, to a 2½ month high, while the AUD has reached 0.74.  Bond yields and equities are little changed.

Markets have been in their typical pre-payrolls holding pattern overnight.  Expectations for payrolls growth have been coming down over the past week, in-line with the softening in some leading indicators, although the median analyst expectation on Bloomberg still sits at a healthy 725k.  With Fed Chair Powell having explicitly linked the timing of a tapering announcement with labour market developments, the market is likely to be sensitive to a major surprise in either direction.  The consensus is that the Fed will wait until November to make a tapering announcement.  A very strong payrolls report might see the market contemplate a September tapering announcement, although the risks to this payrolls report appear more skewed to the downside.

There has been little in the way of economic data to move the market.  US initial jobless claims hit a new post-Covid low of 340k and the broader trend is still lower, indicative of continued improvement in the labour market.

The main feature of overnight market moves has been the continued decline in the USD.  The Bloomberg DXY index is 0.25% lower overnight and down to its lowest level in a month.  The BBDXY has now fallen around 1% since Fed Chair Powell’s dovish Jackson Hole address.

Commodity currencies have outperformed overnight, with the NZD topping the leader board with a gain of 0.6% and the AUD, CAD, and NOK all up by around 0.5% over the past 24 hours.  The AUD has touched 0.74 for the first time in almost a month.  The safe-haven JPY and Swiss franc are barely changed over the past 24 hours.

Against a backdrop of broader USD weakness, the NZD has broken above the top of the roughly 0.69 – 0.71 range that held between mid-June and mid-August.  The NZD is trading this morning around 0.7115, its highest level in 2½ months.  In the near-term, tonight’s payrolls report will clearly be key as to whether the NZD pushes on or reverts into its familiar 0.69 – 0.71 range.  Looking further ahead, our forecasts have the NZD continuing to head north by the end of the year, conditioned on market concerns around the global growth outlook subsiding.

The NZD is stronger on all the crosses, with NZD/AUD is sitting just above the 0.96 mark, NZD/EUR trading just below 0.60, near the top of its multi-month range, and NZD/JPY and NZD/GDP at two-month and three-month highs respectively.

In terms of fundamental drivers of the NZD, one needs to look no further than yesterday’s merchandise terms of trade data, which matched its record high in Q2.  Export prices were up a very strong 8.3% on the quarter, but what caught our attention, from an inflation perspective, was the 4.8% lift in import prices.  The 6.3% rise in imported consumption goods suggests clear upside risk to our already-high 4.3% year-end CPI forecast.

Equity and bond market moves have been subdued overnight.  The S&P500 is up just 0.1%, led by gains in the energy sector, while the US 10-year rate is barely changed, at 1.29%.  On a day of little fresh news, former ‘bond king’ Bill Gross has grabbed the headlines by declaring that US Treasury bonds should be put in the “investment garbage can.”  While we agree Treasury yields are likely heading higher in the medium-term, Gross has had a few high profile bad calls in the past, such as his early 2010 proclamation that UK gilts, then yielding around 4%, were “resting on a bed of nitroglycerine”.  They are now at 0.68%.

The 10-year NZ government bond yield was 1bp higher yesterday, to close at its highest level since April 2019, at 1.93%.  New Zealand bond spreads to other markets continue to widen out, with the 10-year spread to Australia hitting a fresh 5½ year high of 71bps amidst the divergent cash rate outlooks for the two central banks and with the RBA still buying bonds at a pace well in excess of weekly issuance.  Medium-term OCR expectations continue to edge higher, with market pricing for year-end 2023 around 1.75% now, which is closer to the RBNZ’s circa 2% projection.

49 new Covid-19 community cases were announced yesterday, all in Auckland, reaffirming the downward trend after the previous day’s blip higher.  The market now seems to have become desensitized to the daily case numbers, with little immediate impact on the currency or rates.

Nonfarm payrolls will grab all the attention overnight.  Also released is the ISM Services index which is expected to soften from what was an all-time (post-1997) high in July.  The Caixin Services PMI is released this afternoon and is expected to fall, like the official PMI released earlier in the week.