By Mike Jones, Currency Strategist, BNZ
The NZD/USD retreated back towards the bottom end of our favoured 0.8100-0.8245 range overnight. This as the NZD/AUD was slammed by a perfect storm of NZ/AU employment news.
Yesterday's Q2 NZ Household Labour Force Survey was disappointing on all fronts. The unemployment rate edged up to 6.8% (from 6.7%), employment growth slowed, and participation came off the boil. It may be enough to further delay the RBNZ rate hikes we expect.
Local markets certainly thought so. NZ swap rates dipped 4 to 8 bps across the curve yesterday, as any chance of a tightening in the coming 12 months was priced out of the curve. The NZD lost a little ground as a result, with the NZD/AUD bearing most of the brunt.
In contrast, it was more fairies and rainbows across the Tasman as the July Australian employment figures were released. 14k jobs were added, above the 10k expected. Moreover, unemployment held at 5.2%, confounding expectations for a small increase. The detail under the headline showed the labour market is softening at the edges. But it may not be by enough for the RBA to change its growth and/or inflation forecasts, and hence prompt a rate cut in September. As a result, the AUD has outperformed over the past 24 hours.
It's worth noting, the change in NZ-AU monetary policy expectations over the past day or so has seen NZ-AU 3-year swap differentials slide from -60bps to almost -70bps. This widening of the AUD's yield advantage is why NZD/AUD has fallen back below 0.7700. It's also behind the lowering of the estimated 'fair-value' range of our short-term NZD/AUD valuation model to 0.7750-0.7950. We still expect a trend appreciation in NZD/AUD this year, but we may have to revisit the extent of this.
For today, keep an eye out for Chinese trade figures to be released sometime this afternoon. There's also NZ card spending figures to watch for (10:45am release). However, unless the Chinese data throw up a major surprise, we suspect the NZD/USD will see out the week inside the familiar 0.8100-0.8160 range.
The USD strengthened overnight, knocking most of the majors a little lower.
In still quiet trading, investors further reined in their risk appetite a touch, lending support to the 'safe-haven' USD and JPY. This seems to be mostly related to yesterday's softer batch of Chinese activity figures.
There was certainly no evidence of the bounce some had been looking for. Instead, retail sales, industrial production, and fixed asset investment continued to ratchet lower, to levels marginally below analyst expectations (14.2%y/y, 9.2%y/y, and 20.4%y/y respectively). Alongside weaker inflation (CPI fell to 1.8% from 2.2%), these numbers should harden expectations more RRR and/or interest rate cuts are on the way from the PBOC. Indeed, the likelihood of more Chinese policy stimulus probably limited the fallout on markets from yesterday's data.
After sliding lower through London trading, equity markets and commodity prices are finishing the night flat to slightly higher. Our risk appetite index (scale 0-100%) eased from 70.7% to 70.4%.
The EUR led the declines against the broadly stronger USD; EUR/USD slipped from 1.2370 to around 1.2290. As much as easing risk sentiment, this seemed to be about fading interest rate support. EU-US 2-year bond differentials slumped from 15bps to 10bps overnight - a two-year low. If the falls are sustained, EU-US rate differentials around this level suggest some risk of the EUR/USD sliding back towards 1.2100 in coming sessions.
Looking ahead, there appears to be little on tonight's data calendar likely to shake markets out of their rangy slumber. Chinese trade data will likely turn the most heads. A result noticeably weaker than the US$35b trade balance expected may encourage speculation of an imminent (weekend?) Chinese policy easing.
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