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NZD at 0.6910 USD, testing the intra-day low of 0.6885 on 3 January and December low of 0.6860; USD TWI up 0.4% after strong employment data increased Fed hike expectations for the next couple of years; NZDAUD finding some support at 0.9170 mark

Currencies
NZD at 0.6910 USD, testing the intra-day low of 0.6885 on 3 January and December low of 0.6860; USD TWI up 0.4% after strong employment data increased Fed hike expectations for the next couple of years; NZDAUD finding some support at 0.9170 mark

By Jason Wong

The USD is stronger across the board, as strong employment data increased pricing for Fed hikes over the next year or two.  US Treasury yields are higher, while equity markets are unperturbed and are flat.

The USD major currency TWI is up 0.4%, taking it up to its highest level since early January. The dollar was boosted after ADP private sector employment data rose by much more than expected, setting the scene for a bumper payrolls figure on Friday night.  It all but seals a Fed hike next week. That the USD isn’t even stronger probably reflects political factors, with the market still awaiting clarity on any potential fiscal stimulus and past comments from Trump administration officials concerning unwelcome dollar strength if it exacerbates trade imbalances. 

The strong USD sees the NZD probing fresh lows for the year.  It currently sits at 0.6910, above the intra-day low of 0.6885 on 3 January and December low of 0.6860.  Those levels will be in sight for the technicians.  The NZD got off to a rough start early yesterday after the soft GDT dairy auction caused a significant drop in NZX WMP futures on the open.  The April contract fell by almost 10% to USD 2600 and closed at that level.  Clearly, increased dairy supply on the market is having an impact and there doesn’t seem much hope of a price recovery in the near term.

Another contributing factor to a weaker NZD is the run of softer domestic economic releases.  The soft manufacturing sales data yesterday confirmed our expectations that Q4 GDP data next week will be soft.  Our pick is just 0.4% q/q, albeit this follows the strong 1.1% increase the previous quarter.  At a time when the US economic surprise indicator is galloping ahead, NZ’s version is heading south.  That combo, as well as weaker dairy pricing, have been a factor in the NZD’s recent underperformance, not only against the USD but also on the crosses.

NZD/AUD is finding some support around the 0.9170 mark.  Iron ore prices have come under pressure over recent days so the commodity dynamic has also dragged down the AUD.  AUD/USD is down to 0.7535, a 2 cent drop from the peak seen a couple of weeks ago.

Of the majors, the EUR is holding up best against the USD. It has managed to oscillate around the 1.0550 mark over the last couple of weeks despite the general USD strength.  This sees NZD/EUR down to 0.6555, its lowest level since November.  As the French Presidential election draws closer, Le Pen isn’t rising in the polls and she is still expected to lose the second round vote by a comfortable margin.  Traders also have one eye on the ECB ahead of its policy announcement tonight.  The ECB is expected to keep rates and policies on hold, while continuing with QE at previously announced levels.  The market awaits Draghi’s press conference to see if the recent strength in euro area activity and inflation data causes any change in tone about the policy outlook. 

The UK Budget update wasn’t particularly market moving.  It included a stronger UK economy for this year, but softer growth next year and beyond, lower budget deficits and a reduced borrowing requirement over the next 5 years.  The soft NZD sees NZD/GBP slip below the 0.57 mark.

JPY’s strong link to US treasury yields continues.  Higher UST yields see a weaker yen, with USD/JPY up through 114.50.


 

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