S&P 500 down 1% on disappointing employment and ISM non-manufacturing reports

By Kymberly Martin

NZD

The NZD/USD remains around the 0.8420 level this morning.

After fairly quiet trading yesterday the NZD/USD gained some upward momentum early last night. However it ran out of steam at the 0.8450 level after general market sentiment waned early this morning.

The NZD was slightly weaker on most of the crosses. Most notable was the pull-back in the NZD/JPY. It slipped from close to 79.00 to sit around 78.10 currently.

After its very steep ascent late last year the NZD/JPY has been consolidating around these levels for the past couple of months.

Today, all eyes will be on the Bank of Japan. The Bank of Japan will need to over-deliver on market expectations for easing, if the NZD/JPY strengthening trend if to resume near-term.

There is little on the domestic agenda through to the end of the week to impact on the currency. However, there is plenty of event risk offshore.

Aside from ECB and Bank of England meeting tonight, the market will remain firmly fixed on tomorrow night’s US payrolls data.

After last night’s disappointing US ADP employment report, the market may be a little more nervous about tomorrow’s outcome (even though the two series are not necessarily highly correlated).

A soft payrolls report could dampen demand for the USD but also for the ‘risk sensitive’ NZD.

For today, NZD/USD resistance remains at 0.8450. Near-term support is seen at 0.8400.

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Majors

The USD weakened overnight on the back of disappointing US data. The JPY outperformed.

A more subdued tone prevailed in markets overnight. Early this morning, the March US ADP employment report disappointed at 158k (200k expected), with the market ignoring upward revisions to the previous month.

This was soon followed by a weaker-than-expected US ISM non-manufacturing index (54.4 vs. 55.5 expected).

Equity markets declined, with the Euro Stoxx 50 closing down 1.50% and the S&P500 currently down 1.00%. The USD index declined from around 83.00 to sit at 82.70 currently.

The EUR was a beneficiary of the less optimistic view of the US. The market is likely now less sure of a sanguine outcome from tomorrow’s critical US payrolls report. The EUR/USD rose from 1.2800 to sit around 1.2850.

The GBP also managed to find its feet despite a soft UK PMI construction number (47.2 vs. 48.0 expected). The GBP/USD trades around 1.5150 this morning, heading into the Bank of England meeting this evening.

Consensus expects no change in target rate or asset purchases from the BoE. Although the UK economy remains sluggish, it may take until after the May inflation report to persuade the majority of MPC members to vote for more Quantitative Easing (QE).

Today, the Bank of Japan also meets. The JPY strengthened overnight as the USD was shunned. At 92.80 the USD/JPY is now around 4% below its mid-March highs.

This suggests the market has reigned in some of its euphoria regarding expected easing from the BoJ. However, the key today will be how much the Bank can do to keep expectations afloat.

New BoJ Governor Kuroda may be constrained in the amount of stimulus he can deliver, as he struggles to gain consensus with a board largely appointed by the previous government.

He may be constrained to delivering the ‘minimum’ but promising much. If this does not satisfy markets, the recent pull-back in the USD/JPY could continue.

The other central bank under the spotlight tonight will be the ECB. While speculation of an ECB rate cut has risen we see this as unlikely.

Rather we expect President Draghi may use his time to highlight why Cyprus is a ‘special case’. He will aim to quell fears Cyprus may be used as a template for bank resolutions elsewhere in Europe.

Tonight, we also have a number of Fed speakers scheduled. Being mostly of dovish leaning, we do not expect them to challenge expectations that US policy accommodation remains in place for the foreseeable future.

All its research is available here.