New Zealand dollar subdued as Egyptian crisis worsens; Eyes ahead for flat NZ jobs report

Data that could drive the currency was relatively light overnight. There were no major data announcements in NZ yesterday. The US ADP employment data released overnight (187k vs. expectation of 140k) is really a prelude to the more closely watched non-farm payrolls data to be released on Friday.

Friday’s payrolls report will be the more important indicator of whether US fiscal stimulus and improving sentiment is feeding through to an improving labour market, which is still needed to drive a more sustained US growth recovery. For now, the NZD/USD appears to be in ‘wait and see’ mode, trading in a tight band between 0.7800 and 0.7820 overnight.

 

NZ labour market data will be released today in the form of the Q4 HLFS. This will be a focus for the NZD intraday. We expect the unemployment rate to hold at 6.4% but with risks tilted toward a negative surprise.

NZD/AUD touched 0.7760 overnight before returning to a level close to 0.7730. Cyclone Yasi following so closely on the heels of the recent Australian flooding may have kept investors on the side-lines.

 

Tomorrow’s RBA quarterly statement on monetary policy may provide more evidence on how the recent floods are (or are not) impacting the on the trajectory for future RBA rate hikes, which will likely prove to be a key driver of the NZD/AUD going forward.

 

Majors

Currency markets were fairly directionless overnight. Most of the major currencies drifted lower against the USD, largely reflecting a bout of profit-taking.

A relatively perky GBP was the main feature of the early part of the night. The UK January construction PMI carried on the recent run of good UK economic news. The tick up in the index to 53.7 (49.5 expected) helped send GBP/USD from below 1.6150 to 2½-month highs above 1.6220, knocking EUR/GBP from 0.8580 to around 0.8520.

 

More hawkish Bank of England rhetoric also underpinned the GBP. MPC member Sentance (regarded as a hawk) said a rate hike is needed to restore the BoE’s credibility, while Deputy Governor Bean said policy tightening may be necessary if higher inflation expectations become embedded. UK 2-year government bond yields surged nearly 10bps to 1.5% as markets brought forward the expected timing of BoE rate hikes.

 

Strong gains in the GBP helped keep the USD on the back-foot through the early part of the night. However, later in the night, a mild paring of investors’ risk appetite and rising US bond yields saw the USD more than reverse its losses.

 

Not only did ratings agency S&P downgrade Ireland’s sovereign rating to A-, but political tensions in Egypt began to flare up again, pressuring equity markets and risk appetite generally. European equity markets were mixed, while US stock indices are modestly in the red. From above 1.3850, EUR/USD slipped back below 1.3800, GBP/USD headed back below 1.6200 and USD/JPY climbed from 81.40 to briefly above 81.80.

 

Upbeat US data added momentum to the firming in the USD. The US ADP employment report showed 187k jobs were added in January, well above the 140k analysts’ forecast. In response, 2-year US Treasury yields rose 5bps to around 0.65%, while 10-year Treasury yields climbed from 3.40% to around 3.48%.

 

Looking ahead, additional cross-checks on the strength of the US recovery will be provided tonight in the form of the January ISM non-manufacturing index and December factory orders data. However, the focus for investors will be on the ECB’s latest policy announcement for confirmation rising inflation pressures are starting to worry the bank. Almost 90bps worth of ECB rate tightening has now been priced in over the next 12 months. So a failure of the ECB to live up to the market’s hawkish expectations would see the EUR/USD lose some of its lustre. Near-term support is eyed towards 1.3640, with resistance towards 1.3850.