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NZDUSD closed the week at 0.6920, up slightly from Friday; USD TWI dropped 0.5% after unemployment data, released on Friday night, did not upgrade rate hike expectations; NZDAUD traded in a tight range to close at 0.9180

Currencies
NZDUSD closed the week at 0.6920, up slightly from Friday; USD TWI dropped 0.5% after unemployment data, released on Friday night, did not upgrade rate hike expectations; NZDAUD traded in a tight range to close at 0.9180

By Jason Wong

The focus for the market on Friday was the US employment report.  A bumper result was expected and was delivered.  There were no real surprises in the report, with the 235k increase in non-farm payrolls in February above published consensus forecasts of 200k, but many suspected upside risk to those estimates.  The 0.2% increase in average hourly earnings was softer than expected, but revisions meant that the annual increase of 2.8% was in line.

The data cemented expectations for a Fed rate hike this week.  The Fed’s new forecasts will now be the key focus of that release on Thursday morning.  The lack of upside surprise in US inflation data of late including wages, and lack of any fiscal policy clarity, reduces the chance of the Fed upgrading rate hike expectations from the three rate hikes currently projected for 2017.

With no smoking gun for an upgrade of rate hike projections, the USD fell after the employment release, with the major currency TWI down 0.5%, unwinding most of the gain seen earlier in the week.  A contributing factor to that weakness was EUR strength, with some follow-through after Draghi’s press conference the previous session.  Bloomberg reported that the Governing Council discussed the question of whether rates could rise before the end of its asset purchase programme (QE).  With a negative deposit rate acting as a drag on bank profitability and distorting bank lending, there is some merit to this approach.  EUR ended the day up 0.9% at 1.0670.

The NZD broke a rare10-day losing streak to close the week around 0.6920.  That could mark the beginning of a consolidation phase although the FOMC announcement later this week could still interrupt that.  NZX WMP dairy futures have consolidated around the $2600 mark and if pricing has found a floor, then that could reinforce the consolidation phase.  Certainly, if risk appetite holds up near 2½ year highs, then the path of least resistance for the NZD would be to regain the 0.70 handle over the next week or two.  One sticking point is our expectation that Q4 GDP data on Thursday could surprise consensus estimates to the downside, but any market reaction to that dated data should only prove temporary.

The stronger EUR sees NZD/EUR down to 0.6485, taking the fall over the past two weeks to almost 5% and threatening our year-end target of 0.64 some 9 months earlier than expected.  Our playbook of a less dovish ECB is impacting the market much earlier than expected while concerns about the French Presidential election have receded.

The AUD followed a similar path to the NZD, seeing NZD/AUD trade in a tight range and consolidate around the 0.9180 mark. 

GBP remains soft and underperformed most other major currencies.  Manufacturing and construction data confirmed that some economic momentum was lost at the start of the year.  The UK media reported that PM May could trigger article 50 that begins the Brexit process possibly as soon as Tuesday.  From that point on the market will be focused on negotiations and they will look to get off to an ugly start, with the EU wanting to pin down the UK’s hefty “exit fee” to cover current obligations before trade negotiations begin.  GBP closed the week at 1.2170 and NZD/GBP just under the 0.57 mark.


 

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