By Stuart Talman, XE currency strategist
A mixed US jobs report and moderately stronger-than-expected ISM Manufacturing survey induced a head scratcher of a US session to round out the week - treasury yields and the dollar firmed whilst the three major equity indices pared early session gains to end mixed.
Price action see-sawed, indicative of a market that is still trying to figure out if the Fed will hike again before the year is done, and the timing of the first rate cut for 2024.
For the second time over the past three trading days, the New Zealand dollar spiked through 60 US cents, but again failed to establish a base, signaling that NZD bulls lack the conviction to commit to a sustained rebound from the last August year-to-date low, marked a few pips through 0.5890.
A mixed US employment report elicited an immediate risk-on response from the market, yields and the dollar fell, the S&P500 commenced trading up close to three-quarters of a percent.
The US economy added 187,000 jobs through August, surpassing the 170K consensus forecast, however the previous month's Nonfarm Payrolls (NFP) number was again revised down, dragging the prior two-months revisions lower by -110K…..a mixed result.
A jump in the participation rate (62.6% to 62.8%) was one of the reasons behind an unexpected jump in the unemployment rate - reaching its highest level since March 2022, rising from 3.5% to 3.78%.
Finally softer wages growth (0.2% vs 0.3%, expected) also contributed to the overall report being viewed as a win for the doves, leading to a lower implied probability of a November rate hike, odds falling from 50% pre-jobs data to 40% afterwards.
Jerome Powell and his FOMC colleagues are widely expected to maintain a 5.25% - 5.50% Fed funds target rate at the 20 September meeting.
The Kiwi ripped higher immediately following the labour market report, adding circa 50 pips to log Friday's intraday high at 0.6015, its highest level in over 3 weeks.
The gains were short lived…..an aggressive U-turn followed. The catalyst - tough to pin-point.
A stronger-than-expected ISM Manufacturing survey was an obvious contributor to the turn in sentiment, however risk-off flows materialized prior to its release, 90 minutes after NFP. Manufacturing sector activity in the US and other developed economies has printed firmly in contractionary territory for over 9 months as the pandemic induced explosion in households goods spending has evaporated.
Delivering only the second upside beat over the past 10 months, ISM Manufacturing for August printed at 47.6 (vs 47.0, expected), up from 46.4 the month prior. And whilst some of the sub-gauges also surprised to the upside (notably prices paid), the survey is still representative of diminishing factory activity, albeit at a slower pace.
So, the ISM data failed to explain the surge in US bonds yields through the New York morning, the yield on the benchmark US 10-year adding 14bps (4.06% to 4.20%) from the session's peak to trough before ending the week near 4.18%.
Two weeks back, the US 10-yr yield reached a 16 year high through 4.36% amidst a run of strong US macroeconomic data.
Last week's NFP and tier 2 US labour market data (JOLTS Job Openings & ADP Employment change) suggest the labour market is finally starting to loosen under the weight of 500bps of Fed tightening.
As US bond yields rebounded, the dollar ended the session higher versus all its major peers. Shedding around a third-of-a-percent, NZDUSD closed a couple of pips below 0.5940.
For the week, the Kiwi added +0.69% vs the USD with the largest week-on-week gains occurring against the EUR, adding just shy of onepercent as the ECB approaches the end of its tightening cycle. The Kiwi gained over half-a-percent against the GBP, CAD and JPY whilst logging a modest -0.15% weekly loss versus its trans-Tasman neighbour, NZDAUD recovering, ending the week back above 0.92.
The new week commences with the Labour Day holiday in both the US and Canada…..subdued price action likely through Monday.
A relatively quiet week delivers the RBA interest rate decision (on-hold widely expected) tomorrow followed by the Bank of Canada (also on-hold), Wednesday.
The macro data highlights include the US ISM Services PMI, China & AUS trade, eurozone retail sales and GDP for Australia, Japan and the eurozone.
Will the Kiwi continue to rebound through this week?
Wednesday and Friday's intraday highs in the low 0.60's were logged within 10 pips of each other. Friday's ~70 pip reversal has formed a short-term double top, indicative of NZD sellers wrestling back control.
We favour a week of directionless, choppy price action…..expectations are for NZDUSD to range between 0.59 and 0.6020.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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