Market expectation is now 70% chance of US rate hike; pressure on ECB for December rate cut; dovish rhetoric from BoE sees no interest rate change in near term

By Ian Dobbs*:

The US dollar and U.S. Fed rate hike expectations surged on Friday after the release of a block-buster October non-farm payrolls report which saw a gain of 271,000 jobs, well above the 182,000 market expectations.

This was the largest monthly employment gain this year; the unemployment rate at 5.0% is now the lowest since 2008.

Fed rate hike expectations for a December lift-off have moved from ~55% before the number to around 70% now and should make the decision to move an easier one for Fed chair Janet Yellen.

In Europe expectations of a rate cut by the ECB in December continue to mount, whilst across the English Channel dovish rhetoric from the BOE have the market continuing to delay expectations of a move in the near-term from the BOE.

Major Announcements last week:

• German Manufacturing PMI (Oct. 52.3, vs. 52.0 exp.)

• UK Manufacturing PMI (Oct. 55.5, vs. 51.3 exp.)

• Australian cash rate, 2.0% as exp.

• UK Construction PMI (Oct. 58.8 as exp.)

• NZ GDT Dairy index -7.4%.

• NZ Q3 Employment (-11k, +10k exp.)

• Australian Retail Sales (Sep. 0.4% as exp.)

• US ISM Non-manufacturing PMI (Oct. 59.1 vs 56.5 exp.)

• UK cash rate, 0.5% as exp.

• Canadian Ivey PMI (Oct. 53.1 vs. 54.0 exp.)

• US Non-farm Payrolls (Oct 271k vs. 182k exp.)

• US Average Hourly Earnings (Oct. 0.4% vs. 0.2% exp.).

NZD/USD

NZD/AUD (AUD/NZD)

The New Zealand dollar fell sharply last week against the Australian dollar. NZD highs near .9500 (1.0526) were quickly left behind after a combination of factors pushed the pair to NZD lows around .9200 (highs 1.0870) later in the week. These included a lack of a rate cut by the RBA (2.0%) on Tuesday. Adding to this was worse than expected decline in the latest GDT dairy auction prices (Wednesday morning) was promptly followed by a miss in the NZ Q3 employment data (-11k, vs. +10k exp.). The NZD has recovered from its lows after Friday’s U.S. labour report induced heavy selling on the AUD as key commodity prices fell after chances of an imminent U.S. interest rate hike were upgraded.

NZD/GBP (GBP/NZD)

The New Zealand dollar has consolidated within a range against the U.K. pound over the last week. This comes after initially falling heavily post the latest weak GDT dairy auction and NZ Q3 employment data disappointment. It recovered well from lows near .4275 (highs 2.3392) after the dovish comments seen at the BOE monetary policy meeting later in the week. We favour more range trading this week, especially until Wednesday night’s U.K. employment report.  NZD sellers continue to be attracted to levels ahead of .4400 (2.2727).

 NZD/CAD

The New Zealand dollar fell heavily against the Canadian dollar last week after GDT dairy auction and Q3 NZ employment data saw the NZD fall significantly over the week. Both the NZD and CAD have eased against the big dollar post the release of Friday’s strong U.S. employment report, although for now we favour moderate downside to this cross during what is a quiet week data-wise for both currencies. Risk sentiment and key commodity price movements will be important drivers.

NZD/EURO (EURO/NZD)

The New Zealand dollar trades well down against the Euro over the last week after setting highs near .6150 (1.6260). The NZD downside momentum seen after the poor latest GDT dairy auction and weak NZ Q3 employment report has subsided in light of the recent increased speculation of an ECB easing at its next December meeting. With a light data calendar this week in both NZ and Europe, we expect this cross to be contained well within last week ranges.

NZD/YEN

The New Zealand dollar sits near the middle of its range seen against the Yen currently after finding some support under 80.00 following the latest soft GDT dairy auction and NZ Q3 employment report last week. The strong U.S. non-farm payrolls report on Friday has helped bolster the USD significantly against the Yen and has contributed to the NZDJPY staying within a range as the NZD/USD exchange rate found buying interest around the .6500 level. With a light data calendar from both countries this week we see this cross as likely continuing to stay with a 79.85/81.10 type range, although marginally favour the downside. Global risk sentiment is likely to be the key driver.

AUD/USD

After holding up well initially last week against its U.S. counterpart, the Australian dollar has fallen sharply post Friday’s release of a very strong U.S. non-farm payrolls employment report. The lack of interest rate cut by the RBA saw the AUD find some support early in the week, although the divergent monetary policy paths of the Fed and RBA were highlighted by the strong U.S. employment data. Thursday’s Australian October employment release will be important if the AUD is to arrest it’s downwards trajectory, although a sell rallies in the AUD sentiment is favoured.

AUD/GBP (GBP/AUD)                            

The Australian dollar has relinquished much of its gains seen against the U.K. pound last week. These gains occurred after the RBA failed to cut interest rates and the BOE was seen issuing a more dovish than expected monetary policy statement (which saw it downgrade its inflation expectations). Employment data from both countries this week will be pivotal for the next move in this cross, especially if the AUD is to arrest the downside momentum that has been seen after the U.S. employment report. Key commodity price movements will therefore continue to important also for the AUD.

AUD/EURO (EURO/AUD)

The Australian dollar remains firm against the Euro, although off its highs (.6608, 1.5133) after the strong U.S. employment report release on Friday. Heightened talk of an ECB rate cut at its December meeting should see this AUD remain in demand, although Thursdays Australian employment data will be an important driver of the next move. First support should be seen around the .6520 (resistance 1.5337) level. European wide GDP data on Friday and commodity price movements (AUD) will also be noted.

AUD/YEN

The Australian dollar is drifting off its highs against the Yen seen last week (~87.60) after the RBA remained on hold at Tuesday’s monetary policy meeting. The prospect of pending Fed rate hikes has dampened general risk sentiment and placed some pressure on the key AUD commodity price drivers. Thursday’s Australian employment data release could be important for the next move in this cross should it vary greatly from the market consensus. For now we favour moderate downside bias for this pair.

AUD/CAD

The Australian dollar has eased against the Canadian dollar post the release of a better than expected U.S. employment report on Friday. The increased market expectation of a December Fed rate hike has dampened risk enthusiasm, somewhat placing pressure on the AUD. Better than expected Canadian employment data also released on Friday has helped moderate any CAD underperformance. Australian employment data due for release on Thursday should be watched closely.

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