By Stuart Talman, XE currency strategist
Risk assets rallied into the week's close as the yield on the benchmark US 10-year treasury again fell short of punching through 4.90%, marking the second failed attempt in three days to open a path to test the psychologically important 5.00% level.
US equity bulls breathed a sigh of relief, lifting the S&P500 up close to 1.20%, Friday's advance propelling the gauge into positive territory for the week, the 0.48% week-on-week gain ending a three-week streak of losses.
Pro-cyclical currencies benefitted from the market's brighter mood, although net moves were by no means compelling, the New Zealand dollar's +0.44% intraday gain enough to claim the top rung on the G10 leaderboard.
Achieving a third consecutive day of gains, the Kiwi ended the week near 60 US cents, logging a marginal weekly loss of -0.08%.
US stocks rebounding on easing treasury yields as the dollar fell against all major peers bar the Japanese yen……
So, US jobs must printed weaker than expected?
Surprisingly, not the case - it was a white-hot nonfarm payrolls result.
The US economy added 376,000 jobs through September, almost double the consensus estimate of 170K and well above the highest estimate of 250K. In addition, the prior month's result was revised higher by 40,000 jobs.
September's eye popping NFP marked the quickest pace of jobs growth since January, representative of a US jobs market that continues to confound, remaining robust despite the Federal Reserve unleashing the most aggressive monetary tightening campaign in over 40 years.
As you would expect, the immediate reaction was risk-off.
The 10-year yield rocketed from 4.74% through 4.88%, propelling the US dollar higher, the dollar index spiking to within a few pips of 107.00.
Having traded in a condensed 0.5950/70 range throughout Friday's Asian and European sessions, NZDUSD dropped from the 0.5960's into the 0.5920's, appearing vulnerable to a deeper protraction given the strong NFP number adds weight to the case for the Fed to resume hiking at its 01 November FOMC meeting.
However, the Kiwi and other pro-cyclical currencies reversed course through the New York morning as US equity markets recovered from their soft opening, NZDUSD recouping all its NZP losses within a few hours before venturing further into positive territory.
Why the turnaround?
The headline nonfarm payrolls number is one of multiple data points that comprise the Bureau of Labor Statistics monthly labour market report.
Offsetting hotter-than-expected jobs growth, the unemployment rate remained at 3.8% (vs 3.7%, expected) whilst wage inflation printed lower than expected, month-on-month average hourly earnings at 0.2% (vs 0.3%, expected).
Digging deeper into the jobs report, much of the NFP beat could be attributed to government jobs (which are less productive than private sector jobs) whilst the household survey reported little change in jobs growth.
A reminder that the government releases two estimates of US employment growth - the establishment and the household, the former (and more widely reported) based on a survey of firms rather than households. On occasion, these two surveys can report notably different conditions.
Once the market fully digested the numbers, the dovish aspects of the report trumped the headline NFP, enabling US equities to rally throughout the New York afternoon.
Another reason for the kneejerk reaction fading - stretched positioning in the lead up the jobs data.
An eye watering rally through September and into the first week of October had propelled US treasury yields to 16-year highs whilst US equity markets had been driven down into oversold levels, the S&P500 and Nasdaq coming off their worst quarters since December.
As is often the case, when markets become overstretched, they snap back as a rubber band does.
Closing the week a pip or so south of 0.5990, the New Zealand dollar once again sets up to test the 0.6000/50 resistance zone that has capped NZDUSD upside on multiple occasions over the past seven weeks.
Against its other major peers, the Kiwi also logged week-on-week declines against the JPY (-0.11%), EUR (-0.23%) and GBP (-0.39%) whilst gaining against the CAD (+0.55%) and AUD (+0.72%).
Attention now turns to this week's headline event, the September US CPI report, headline inflation expected to ease from 3.7% to 3.6% and core from 4.3% to 4.1%.
Market pricing assigns a slightly less than 30% implied probability of a 25bps hike from the Fed at its 01 November meeting and a circa 50% implied probability of an additional quarter point by the end of the year.
An upside CPI surprise would likely push the 10-year yield through 5.00% and the dollar index through 107.00 as odds for a November hike firm. Conversely a soft or in-line CPI will be cheered by risk sensitive assets, likely delivering an important topside range breakout for the Kiwi above 60 US cents.
A quiet economic calendar in the week ahead presents CPI for Germany and China, US producer prices and Uni of Michigan consumer sentiment. There are no local market moving events.
Whilst it’s a subdued week for data releases, it’s a big week for central bank speakers. A constant stream of speeches from Fed, ECB and BoE officials are to be delivered via the NABE and IMF conferences.
The aforementioned 0.6000/50 NZDUSD resistance zone presents as our key topside region to monitor whilst on the downside 0.5860/80 is an important support zone.
A breakout from the 7-week range hinges on the outcome Thursday evening's US CPI report.
We're tentatively backing a good week for risk sensitive assets, including the New Zealand dollar on the assumption that core inflation for the world's largest economy prints in the region of 3.9% - 4.1%.
Although given the shocking developments over the weekend as Hamas unleashed a devastating attack on Israel, risk asset may open lower to start the new week.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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