by Mike Jones
NZ Dollar
The NZD was the strongest performing currency last week. Actually, the more appropriate title might be ‘least worst’ performing, as the headwinds from a broad strengthening in the greenback knocked all of the major currencies lower.
On Friday, a full cent was eventually shaved off the value of the NZD/USD after an upbeat set of October US employment figures blew wind into the USD’s sails.
Speculation is mounting that the FOMC could now begin ‘tapering’ QE purchases as early as December. The NZD/USD has opened the week a smidge higher than Friday’s close thanks to some positive Chinese news over the weekend. But at around 0.8250, the kiwi is still almost 2% below last week’s 0.8400 highs.
The coming week is a little quieter as far as global event risk goes. This may afford the NZD/USD some time to consolidate last week’s losses. Incoming Fed chair Yellen’s Senate hearing will be the focus of attention. It seems unlikely Yellen will say anything to further juice up the USD given her relatively dovish views.
Local influences look set to be a little more important for NZD direction this week. The overall tone of incoming data is expected to remain NZD positive.
October’s REINZ housing report may be propped up by folk scrambling to buy before their pre-approvals run out.
This morning’s electronic card transactions are expected to rebound a hefty 1.3%, Thursday’s PMI should hopefully hold around its solid 54.4 level of September, and Q3 retail volumes are forecast to increase a decent 0.6% (following Q2’s outsized 1.7% gain). There’s also Wednesday’s RBNZ Financial Stability Review to keep an eye on.
Despite the expected positives of this week’s data, the currency is fairly close to breaking some key support levels. A squeeze below 0.8190 would be significant in technical traders’ eyes, potentially paving the way for a deeper pullback towards 0.8000. 0.8190 is also the level at which our momentum model would enter a NZD/USD short position. Absent a downside break, we suspect the currency will spend most of the week consolidating in a 0.8200-0.8340 range.
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Majors
The USD surged against all the major currencies on Friday, after October’s strong non-farm payrolls (NFP) data reignited speculation of a December Fed taper. The narrow DXY index was swept around 0.5% higher.
A sizeable 204k jobs were added in October, well above the 120k consensus. Moreover, upward revisions to September and August (totalling 60k) put the 3-month average of payrolls growth back above 200k. This is probably above the FOMC threshold of ‘sustainable improvement’ in labour market conditions. Combined with the stronger growth in Q3 US GDP (2.8%), the Fed may now have enough economic ammunition to begin tapering QE.
This was certainly not lost on the market, with 10-year US bond yields gapping some 12bps higher in the wake of the payrolls data (to close the week at 2.74%). The attendant yield support for the greenback saw the EUR/USD lose another 0.4% (to 1.3365), with the GBP/USD down 0.5%, AUD/USD off 0.8% (to 0.9385), and USD/JPY up 1.0% to close above 99.00 for the first time since late September.
Certainly, the NFP report is being treated with scepticism in some quarters due to the impact the government shutdown had on data collection. The risk of a downside surprise in the next batch of data is higher than usual. The November NFP report (due 6 December) will now be even more closely watched, with a solid print perhaps enough to see the Fed taper on the 18th December.
The coming week is fairly quiet on the US data front, but Janet Yellen’s nomination hearing on Friday will ensure US monetary policy expectations remain the dominant driver of currencies. Yellen has not spoken for some time so expect her every word to be parsed for her policy views.
In Europe, reaction to final CPI figures on Friday may be dulled by the ECB’s front-footed interest rate cut last week. We nevertheless look for additional EUR/USD weakness as relative economic and interest rate differentials move against the single-currency. We may see a test of the 1.3220 200-day m.a this week.
It’s a busy week for the UK, with CPI, labour market data, retail sales, and the BoE’s November inflation report due. The risks here are perhaps tilted towards GBP strength (EUR/GBP weakness) if the BoE revises its unemployment forecasts lower.
In China, and following the weekend’s encouraging data (see below), the 18th Communist Party Plenum runs through to Tuesday. While important, the market implications are scant. There will be no formal press release or policy announcement.
Other news:
*US unemployment rate rises from 7.2% to 7.3% in October (as expected).
*US University of Michigan consumer confidence falls to 72.0 from 73.2 (74.5 expected).
*PCE deflator drops back below 1% (0.9%) with the core PCE deflator steady at 1.2%.
*Chinese industrial production picks up to 10.3%y/y in October (10.0% expected).
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