On Friday, the NZD was the strongest performer, while European currencies underperformed.
Friday night’s solid US payrolls report seems to have removed the final hurdle to a Fed rate hike on 16 Dec. Overall, apart from a little immediate volatility the response from currencies (and bonds) was fairly contained.
This raises the possibility that when the Fed finally pulls the trigger on one of the most anticipated hikes in history, it proves a bit of a non-event for markets.
The USD index ended the week at a similar level to its pre-payrolls level, at 98.30.
However, the post payrolls rally in US equities was notable. The market appears to have read the data as reason for confidence in the economic outlook, rather than taking flight at the prospect of imminent reduction in US Fed stimulus. Consequently, the S&P500 closed up 2.0%.
Early Saturday morning, in NYC, ECB President Draghi, took another opportunity to try and spell out the Bank’s message on monetary policy, saying “we are ready at any time to recalibrate our array of tools”.
He defended Thursday’s decision, saying the ECB’s QE recalibration was “exactly the right one” and that the ECB will reach its inflation goal “without delay”. However, he admitted that “the exchange rate helps transmit ECB policy to prices”. As such, he must have been somewhat dismayed at Thursday’s move in the EUR.
Post these comments and the US payrolls release, the EUR/USD ended the week a little lower, at 1.0880.
The CAD had a very volatile night. Initially the CAD fell sharply as the USD employment report coincided with the release of weak Canadian employment data. However, a couple of hours later a very strong Canadian Ivey purchasing manager’s report saw the CAD rebound. The USD/CAD ended the week at 1.3360.
The NZD/USD slipped a little, immediately following the US payrolls report. However, in the early hours of Saturday morning it surged higher, seemingly helped by some positive NZD/AUD flow. The NZD/USD and NZD/AUD ended the week close to 0.6750 and 0.9200 respectively.
In a reasonably slow start to the week, the domestic market will now have its eyes firmly on Thursday’s RBNZ meeting. Ahead of this, the NZD/USD will likely encounter resistance on any push toward 0.6800.
Our central view of a 25bps cut from the RBNZ this week, is priced at less than a 50% probability by the market. If delivered, the NZD will therefore be vulnerable to a sharp knee-jerk step lower. However, the extent of any such move would likely be dependent on the associated RBNZ commentary. The blow would be lessened if the RBNZ statement was to move away from an explicit easing bias.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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