By Stuart Talman, XE currency strategist
The US dollar softened against all its major peers through Friday driven lower as US bond yields fell from the week's highs on a mixed jobs report that delivered the first downside miss in non-farm payrolls (NFP) since 1Q 2022.
Commodity currencies benefitted not only from falling treasury yields, also from stronger commodities - WTI crude ascending to the top of a 2-month range whilst base metals firmed.
The New Zealand dollar gained just shy of one percent, recovering from near 0.6130 during the early hours of Friday morning to trade back through 0.6180 during the first half of European trade.
Following the release of the June labour market report for the US economy, the Kiwi caught another bid, ascending back through 62 US cents, marking the week's high at 0.6220 before easing back to end the week ~15 pips off the high.
Upside data beats for ADP Employment change and the ISM Services PMI, 24 hours earlier, had primed the market to expect a similarly hot NFP print. Instead, headline jobs growth missed the mark, the US economy delivering 209K new jobs during June (vs 225K expected), the lowest reading since December 2020. In addition, the prior two months results were revised lower. As expected, the unemployment rate edged down from 3.7% to 3.6%.
Whilst Fed officials would have been pleased with softer jobs growth, the stronger-than-expected average hourly earnings data point (0.4% MoM vs 0.3%, expected) is indicative of wage inflation that remains persistently high.
Ultimately, June's jobs numbers won't deter the Fed - a 26 July hike appears a done deal.
It would take a significant downside miss for this week's US CPI report to alter the Fed's near-term path. Market pricing assigns a less than 10% implied probability of an on-hold decision.
Market pricing also currently calls for a terminal rate just above 5.40%, thereby not buying into the June FOMC dot plots which projected a median outcome of two additional 25 bps hikes.
Should inflation data continue to track lower between now and the 20 September meeting in addition to a loosening of labour market conditions, the market, rather than the Fed is likely proven correct…..in this scenario, all else being equal, the dollar weakens against the Kiwi and other majors as we head into the final quarter of 2023.
In a productive week for the Kiwi, NZDUSD gained just shy of +1.50% with the largest week-on-week gain occurring against the Canadian dollar, up +1.63%.
Breaking through key resistance near 0.9250, NZDAUD climber over one percent, marking 6-week highs through 0.9300 before ending the week near 0.9260. Wednesday's RBNZ interest rate decision and accompanying statement will influence the antipodean cross's short term directional bias.
Against the EUR, the Kiwi gained +0.87% for the week. Whilst downside pressures persist, NZDEUR is attempting to base having failed to challenge year-to-date and three-year lows below 0.5550, rebounding back through 0.57 before ending the week near 0.5650.
The Bank of England presents as the most hawkish of all major central banks given core UK inflation continues to climb……the BoE expected to hike the bank rate through 6%. As such the pound is the strongest performing major against the dollar, climbing over 6%, year-to-date.
Against the Kiwi, the pound has gained over 8% with further downside through three-year lows below 0.48 likely. NZDGBP eked out a weekly gain of around a third-of-a-percent.
Finally, against the JPY, the Kiwi logged a marginal weekly decline, easing back from 8-year highs near 90.00 to end the week around 88.20. Speculation had been growing through last week that Japan's Ministry of Finance (MoF) would intervene as it did last November when USDJPY was trading in a 145.00-146.00 band. Pulling back to the low 142.00's, the MoF remained inert.
Looking to the week ahead, US CPI is the major global event whilst the RBNZ's interest rate decision is the headline local event. We'll provide more colour on these events and what to look out for, tomorrow.
Other events of note include CPI for China, UK Jobs, the BoC rate decision, and the US producer price index. In addition, it’s a busy week for central bank speakers.
The New Zealand dollar continues to track sideways, price action mostly contained between a 0.6000 - 0.6200 range over the past 6 weeks. Friday's advance lifts NZDUSD to the top of this range and back through the 100-day and 200-day moving averages which have converged over the past fortnight.
Our two key levels to monitor to start the week - the 16 June high at 0.6248 and 0.6140 which provided support on multiple occasions this past week. Should price action extend through 0.6248, breaking through descending trendline resistance, the NZD bulls likely drives the pair back to 63 US cents.
Conversely, should NZDUSD fail to hold above 0.6140, weighed down by a potentially dovish RBNZ and/or upside US CPI beat, a path may open to re-test 60 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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