By Stuart Talman, XE currency strategist
See-sawing price action characterised Friday’s US session as risk assets were forcefully sold immediately following the release of a stronger-than-expected US jobs report.
Polled economists had forecasted around 200K new jobs created for the US economy in November – the headline non-farm payroll data point printing at 263K.
Whilst the unemployment rate remained steady at 3.7%, the average hourly earnings component of report was a major talking point.
Doubling expectations (0.6% vs 0.3% MoM), the hot wages growth number raises concerns over a potential wage-price spiral, potentially requiring the Fed to prolong the tightening cycle, hiking the Fed funds target rate beyond 5%.
Wage-price spiral concerns a key factor in forcing the RBNZ to step-up to a 75 bps hike at its most recent meeting.
US equities came under pressure in the wake of the undesirably strong labour market update, the S&P 500 down over 1.2% at the open.
Having ripped higher following Powell’s (questionably) dovish speech on Thursday morning, the New Zealand dollar was trading just above 64 US cents prior to the release.
The Kiwi plunged through 0.6330 in response.
Observing the price-action in real-time, the immediate thinking was the session ahead would deliver a huge downside move for US stocks given Thursday’s “overreaction” to Powell’s speech.....the Kiwi likely to struggle to maintain a foothold above 63 US cents.
The opposite occurred.
The three major US indices shrugged off the strong data, bid throughout the New York afternoon to end the session back near positive territory, the Nasdaq closing down only -0.4% having been down close to 2% shortly after the open.
The S&P 500 was marginally lower whilst the Dow inched back into the green.
US equities and other risk-sensitive assets had been flashing signs of waning topside momentum, however back-to-back weekly gains have re-invigorated the market for another surge as we close out a remarkably unprecedented year.
Vigorously bid throughout the second half of US trade, the Kiwi ended the week a few pips above 64 US cents – the first time it has closed above this mark since 12 August.
This date marked a significant high for the Kiwi as three months of heavy selling followed, risk assets driven lower by Powell’s hawkish late August Jackson hole speech and the stronger-than-expected August CPI report (released 13 SEPT.).
The Fed also initiating the third of its four consecutive 75bps hikes on 21 September also contributing to the Kiwi marking its 13 October cycle low at 0.5512.
From this point the NZD has been one of the strongest performing currency.
Climbing over 2.60% for the week, only the Japanese yen outpaced the Kiwi, adding 3.50% as the shrinking interest rate differential between the US and Japan reverses some of 2022’s heavy JPY selling.
Over the past month the yen also leads, gaining 8.40% whilst the Kiwi sits second on the G10 leader board with a monthly gain of 8.26%.
The Australian dollar sits in the bottom-third producing a gain of just over 5% during this period.
Back-to-back days of ferocious buying has catapulted NZDAUD through 0.94, Friday’s highs logged a few pips above 0.9420.
It’s the highest the antipodean cross has traded since late January.
Yes, the RBNZ is now the most hawkish major central bank and yes, interest rate differentials between NZ and AUS continue to widen.
But, the upside move looks well overdone.
At some point, economic fundamentals, such as Australia’s significantly more favourable terms of trade will wrestle back control of the antipodean cross.
Kiwi importers with suppliers across the Tasman – you’re being presented with opportune levels.
The RBA is widely expected to raise the policy rate by another 25bps to 3.10% , tomorrow afternoon.
In other news to close out last week, Chinese authorities continue to loosen Covid restrictions in the wake of last week’s powerful demonstrations.
Shanghai joined other major Chinese cities by impending more relaxed protocols, scrapping the need for conduct PCR tests to access outdoor public spaces/services such as parks and public transport.
A number of other cities also announced an easing of restrictions over the weekend.
President Xi could have chosen one of two paths following the protests – oppression or re-opening.....last week’s developments providing evidence that Xi has shifted his thinking towards managing covid.
China new flow will continue to by a key driver of direction in the week ahead.
Other market movers include the aforementioned RBA interest rate decision, eurozone retail sales (this evening) and GDP, ISM Services PMI (US) and GDP for Japan.
Along with the RBA, the Bank of Canada also meets to update monetary policy.
Risk sensitive assets have resume their march higher following a very brief pause.
In a relatively quiet week on the US calendar and the pre-FOMC blackout period commencing, the path of least resistance remains to the upside.
It will be interesting to see how the Kiwi behaves in the region between the August high, near 0.6470 and 65 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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