NZD lower, with second push down by poor Chinese trade numbers. Currency and bond markets have different views of when the US Fed might raise rates

By Raiko Shareef

NZ Dollar

NZD was shunted lower by strong US employment numbers on Friday night.

NZD/USD closed 0.4% lower at 0.7360.

It sits at 0.7340 this morning, after a poor set of Chinese trade numbers over the weekend.

NZD managed to outperform most of its peers amidst the USD rally on Friday. It sat on the brink of breaking important resistance at 0.7450 just before the US employment reports were released.

After the intense focus on the RBNZ (and RBA) events over the past fortnight, we suspect that the Antipodean currencies are in for some relative respite.

Both central banks appear in no hurry to give markets reasons to price in further rate cuts.

For New Zealand in particular, local data is expected to support the RBNZ remaining on hold.

It is a quiet week locally, with second-tier data events unlikely to give much read on NZD’s direction. It will likely wax and wane in line with global sentiment.

We expect it to remain an outperformer over the near-term.

Today, we pick a 0.7310 – 0.7380 range.

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Majors

The USD punched higher after bumper employment reports on Friday night. EUR ranked amongst the biggest losers, as Greece’s efforts to renegotiate its debt are stonewalled by Europe. AUD outperforms, as RBA downgrades forecasts only modestly.

According to January’s report card, the US labour market is firing on all cylinders, and vindicates the recent (and consistent) Fedspeak pointing toward a mid-June rate hike. Payrolls growth for January surprised on the upside (+257k vs +228k exp.), with 147k of upward revisions to November and December. As a result, over the past three months, more than a million jobs were added to the US economy, for the first time since 1997.

Importantly, wage growth made a strong showing in these reports (unlike the disappointment in December). In January, average hourly earnings growth at 0.5% m/m, the strongest monthly gain since 2008.

These reports saw the USD gain strongly, with the Bloomberg Dollar Spot Index up 1.0%. Relative to the reaction in interest rate markets (+16 bps in US 10-year bond yields), this was downright muted.

We’ve been of the notion that currency markets (and the USD in particular) have been pricing in a mid-2015 lift-off in the Fed Funds Rate, a prospect that the rates market has long been sceptical of. The asymmetric reaction on Friday night gels with that view.

The EUR was particularly hard hit, down 1.4% to 1.1320. It was subject to particularly wild swings last week, sensitive to the game of chicken occurring between Greece and its debtors. On Thursday, the ECB announced it would no longer accept Greek bonds as collateral for credit. While Greek banks have other avenues to access funding, the political signal to Greece’s new government was clear. Its debtors were unimpressed with the proposals presented by Greece’s prime minister and finance minister. With the possibility that Greece could run out of funds as early as the end of February, we expect volatility to remain high.

The AUD finished the day unchanged on Friday, having benefitted earlier from a set of RBA forecasts that were less negative than the market had feared. The outlooks for GDP and underlying inflation were shaved by no more than 0.25ppts. That said, our NAB colleagues point out that these forecasts are based on the assumption of another 25bp cut in the near-term. This is a change in technical tack from the RBA, which usually forecasts on the basis of an unchanged rate track.

AUD closed effectively flat at 0.7800 on Friday night, but opened lower this morning on the back of poor Chinese trade data. Imports plunged by 19.9% y/y (a 3.2% fall exp.), while exports dropped by 3.3% (a 5.9% gain exp.). AUD sits 0.4% lower at 0.7770.

This week, the major-economy highlights for us will be the Bank of England’s quarterly Inflation Report (Wed), US retail sales (Thu), and euro-zone GDP (Fri). Closer to home, the NAB business survey (Tue) and Australia’s labour market report (Thu) are due. RBA Governor Glenn Stevens has two speaking engagements (Mon, Fri). The latter, in front of the House Economics Committee, will be the more closely watched.

All its research is available here.