By Stuart Talman, XE currency strategist
Expectations for a quiet 24 hours of trading have been met, price action across asset classes constrained in tight ranges amidst an absence of tier 1 data releases.
Whilst the dollar has ceded some of last Friday's US jobs data induced gains, the upside bias sustains as the dollar index consolidates a circa 4% rebound off late December lows.
The New Zealand dollar is a top three performer amongst the G10 cohort, adding around a third-of-a-percent, ascending back through 61 US cents on the back of stronger-than-expected labour market data.
Following Friday's 100 pip plunge from 0.6160, the bulk of NZDUSD price action was contained between 0.6040/80 through the first half of this week, the pair feeding into the upper realms of this range ahead of yesterday's jobs numbers.
Whilst the unemployment rate did rise from 3.9% to 4%, the result was below both consensus and importantly, the RBNZ's forecast of 4.2%. Likewise, the labour cost index represented a tighter domestic labour market relative to forecasts, wage inflation climbing from 0.8% to 1% for the December quarter (vs 0.8%, expected). Employment change also exceed the RBNZ's forecast of a 0.2% quarter-on-quarter lift, printing at 0.4%.
Whilst it is clear the domestic labour market continues to loosen; progress is slower than the RBNZ forecasts and therefore will keep Governor Orr and his assistant governors attentive to upside inflation risks.
Like other major central banks, it's premature to commence discussing the timing of the first rate cut and in the case of the RBNZ, yesterday's jobs numbers may raise questions regarding a 5.5% OCR being sufficiently restrictive.
You will recall that when the RBNZ last released its quarterly Monetary Policy Statement at the 29 November meeting, the OCR track was revised marginally higher, leaving the door open to additional monetary tightening should the disinflation process stall.
Rates markets are also attuned to the possibility of additional tightening, the odds of a 28 February hike rising from around 5% to 20% after digesting the hawkish employment report.
The most likely outcome from the first monetary policy meeting for the year - a hawkish hold whereby the RBNZ clearly retains a tightening bias, referencing the strong jobs data and still elevate non-tradeables (aka domestic) inflation.
Firmer against most of its major peers, the notable technical move for the Kiwi occurred against its trans-Tasman neighbour, NZDAUD punching through major resistance at 0.9350 to mark intraday highs a few pips shy of 0.9380.
It’s an important development for NZD bulls, suggesting that further upside in the short to medium term may lift the pair through 0.9400 to mount a possible test to the 2023 high near 0.9470.
Failure to decisively extend beyond 0.9400 - the pair feeds back into the 0.9150 - 0.9400 range that has constrained price action for close to 9 months.
Looking to the day ahead, the regional highlight is CPI and PPI for China - deflation expected to deepen, the consensus projecting consumer prices to decline from -0.3% to -0.5%.
China's woes prevail.
A quiet offshore calendar is devoid of tier 1 data releases, therefore US weekly jobless claims will capture heightened attention.
Nothing to see here…..the Kiwi to continue to meander along, not willing to venture too far from 61 US cents.
Stuart Talman is Director of Sales at XE. You can contact him here.
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