FX Update: Kiwi Dives On Weak Jobs Print

The New Zealand Q1 employment report came out weaker than expected overnight, with no change in the revised-higher unemployment rate (at 5.8% ) rather than the expected drop. Also, the employment change rise was slightly smaller than expected, though there were still solid job gains on the month and the participation rate strength partially explains the weaker than expected unemployment rate. Earnings growth also fell short of expectations, so all in all, the market was happy to continue the NZD selling theme and AUDNZD jumped through the 1.0500 level and NZDUSD traded lower, even in a very weak USD environment.

We’re still two days from the week’s critical event, the US employment report on Friday, but today we may get a test of whether the USD doubters can continue to sell the greenback if we get a strong ADP number. It was remarkable that the market entirely ignored yesterday’s strong ISM non-manufacturing survey. The key driver here may be positioning rather than US data/Fed outlook as the “macro trade of the year” – long European equities on ECB QE and hedging the currency exposure – has been going terribly wrong lately. Both legs of this trade headed in the wrong direction over the last week, and significant positions may be getting taken out ahead of an obviously important US jobs report as the market frets and even worse train-wreck if we see a weak report. The question from here is whether this trend/squeeze is largely played out, or whether we risk another extension post-Friday. In other words, everything boils down to how much positions have been adjusted at this point and to the report itself. Stay tuned.Chart: NZDUSDThe downside NZDUSD argument looks more compelling after the weak NZD data overnight, but a look at the USD levels elsewhere is cause for pause and it will be tough for this pair to continue to drive significantly lower unless we see the USD putting up a fight and rallying after Friday’s jobs report.


The G-10 rundownUSD: Generally weak as the market oddly ignored the strong ISM non-manufacturing survey yesterday and apparently figures that the Fed wants to be beaten over the head with profound evidence of a strong Q2 comeback before shifting rate expectations higher. Friday’s US employment report feels like an enormous catalyst either way.EUR: The squeeze continues and is clearly related to equity market softness. What happens on Friday if we see a strong US payrolls number, however? If this finally shifts Fed expectations more significantly higher, could that not also damage risk appetite, but support the USD? Interested in any case on whether we see a shift in the current paradigm or risk appetite/EURUSD negative correlation, where it seems there is no difference between trading European stocks and EURUSD.JPY: Trading passively this week as Japan returns from its extended holiday tomorrow. Biggest interest is in USDJPY around Friday’s US employment rate and how it will respond if the Fed hike anticipation is shifted higher on a strong number. Traditionally, USDJPY has been the most reactive to US data, though this hasn’t been the case for some time due to the advent of the euro carry trade.GBP: Sterling waiting for the election results later this week or even over the weekend – a Tory government would be far more Sterling-supportive than a Labour one, and it seems the polls are on a knife-edge, so the market isn’t sure what to do though we’ve now priced in an appropriate dose of caution as there is still GBP downside risk if we see a Labour victory.CHF: Still relatively firm as EU peripheral spreads went the wrong way yesterday after recent improvement, and there may be an element of safe haven flows. 1.0350 is a Fibonacci support in EURCHF and USDCHF is looking remarkably cheap if we see strong payrolls data from the US this Friday.AUD: Tonight’s Australia employment report a key catalyst as the market has waxed suddenly very optimistic on Australia’s fortunes, perhaps in particular after a strong China Services PMI overnight. Mean-reversion risk is partially priced in, but the market won’t appreciate a weak jobs report tonight.CAD: Maintaining strong levels against the USD on strong oil prices and despite yesterday’s news that March saw the worst trade deficit in modern Canadian history. Today’s Ivey PMI could add color, though it is a notoriously jumpy survey. It’s more about the relative strength of Friday’s Canadian and US payrolls data. USDCAD at 1.2000 is a critical area.NZD: Weakness across the board after the weak employment numbers overnight and as the market is moving more aggressively to price in future rate cuts from the RBNZ. This will look a bit overdone soon, but kiwi has suffered a massive break and looks like a sell on rallies in the weeks to come.SEK: No view as long as we’re in this tight EURSEK range between approx. 9.20 and 9.40, as we’re unsure what the next catalyst might be to move SEK.NOK: All about tomorrow’s Norges Bank meeting. It would be relatively easy to look for a dovish surprise relative to rate developments at the front end of the Norwegian yield curve, but crude oil prices trading near $70/barrel suggest the action could just as easily see NOK stronger if the Norges Bank is passive or talks up housing bubble risks now that the oil prices have stabilised and even improved dramatically.

Economic Data Highlights

  • New Zealand Q1 Unemployment Rate steady at 5.8% vs. drop to 5.5% expected
  • New Zealand Q1 Employment Change rose +0.7% QoQ and +3.2% YoY vs. +0.8%/+3.3% expected, respectively and vs. +3.6% YoY in Q4
  • New Zealand Wages rose +0.3% QoQ vs. +0.4% expected
  • UK Apr. BRC Shop Price Index out at -1.9% YoY vs. -1.7% expected and vs. -2.1% in Mar.
  • Australia Mar. Retail Sales out at +0.3% MoM vs. +0.4% expected
  • China Apr. HSBC Services PMI out at 52.9 vs. 52.3 in Mar.

Upcoming Economic Calendar Highlights (all times GMT)

  • Eurozone Apr. Final Services PMI (0800)
  • UK Apr. Markit/CIPS Services PMI (0830)
  • Euro Zone Mar. Retail Sales (0900)
  • Sweden Riksbank Governor Ingves to Speak (1000)
  • US Apr. ADP Employment Change (1215)
  • US Q1 Unit Labor Costs/Nonfarm Productivity (1230)
  • US Fed’s Yellen to Speak on Panel (1315)
  • Canada Apr. Ivey PMI (1400)
  • US Fed’s George to Speak (1715)
  • Us Fed’s Lockhart to Speak (1730)
  • Australia Apr. AiG Performance of Construction Index (2330)
  • Australia Apr. Employment Change/Unemployment Rate (0130)
  • Japan Apr. Markit Japan Services PMI (0135)
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