NZD/USD falls to 0.7300 after US jobs report but NZD/AUD holds all its gains

Key Movers

The Aussie Dollar was the worst performer amongst the major currencies in what turned out to be a very volatile week across asset classes. After a soft set of CPI data and a manufacturing PMI report which was nothing like as strong as the accompanying text would have suggested, AUD/USD was briefly back below 80 cents on Friday morning and immediately before the latest US employment report was trading around 0.7990. The US Dollar had not gained any support from rising US bond yields all week, but news of a 2.9% y/y increase in US average earnings (the highest since 2009) pushed 10-year Treasuries to 2.84% and the USD surged as analysts began to pencil in a 4th rate hike in the US for 2018.



Rising bond yields and a higher USD had a dramatic effect on the equity market with the Dow Jones

Industrial Average spookily down 666 points by the close; a 2.5% daily drop and the worst day of the

Trump Presidency. The weekend has seen a lot of commentary about how this is a ‘normal

correction’. What is absolutely not normal in recent experience, however, is that bond yields rose

even as stocks tanked. In every other correction of the post-GFC era, the assumption has always been

that falling stocks would be accompanied or immediately followed by lower bond yields. This hasn’t

happened this time around. Maybe it really is different?



We’ll see what the RBA has to say – if anything – about the value of the currency when it sits down to

its first Board meeting of the new year next tomorrow and on Friday when it releases its latest

Quarterly Statement of Monetary Policy. Before that, there are two service sector PMI reports this

morning and the Melbourne Institute monthly inflation gauge. The Australian Dollar begins this first

full week of the month having closed in New York on Friday at USD0.7920, with AUD/NZD at 1.0850

and GBP/AUD1.7825.


The remarkable weeks just keep coming for the British Pound, though this time it was remarkable because GBP/USD actually finished pretty much unchanged having traded in a high-low range of 2¾ cents. After opening around 1.4135 in Asia last Monday morning, the GBP then broke its 11-day streak of never testing the previous day’s low; a sequence which had seen it rally from USD1.3450 all the way up to 1.4330. With that record gone, GBP/USD broke below 1.40 on Tuesday morning but just as it looked set for a big fall, it rallied sharply in line with all the non-US currencies and by Thursday it was back up at 1.4275.



There was little or nothing in terms of incoming economic data last week which would justify a higher

GBP. If anything, the news was very much on the negative side of the ledger. But, immediately prior

to Friday’s US labour market report, GBP/USD stood at 1.4220. By close of business it had fallen

almost exactly a cent to 1.4125. We said on Friday that, “the weekend Press is unlikely to be kind to

the government, and Prime Minister May returns from her China trip with even more uncertainty

about her own future and her ability to successfully negotiate a post-Brexit deal.” This is exactly how

it has turned out, with rumours of a leadership challenge and pressure on the PM to clarify her own

intentions.



For the week ahead, there’s a Bank of England MPC meeting on Thursday. In his appearance before a

House of Lords Select Committee last Thursday, BoE Governor Carney hinted that the Bank is

preparing to upgrade the forecasts in its Inflation Report. “I would expect that in 2019 we will see a

pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly

Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.”

Whether the Bank’s relative optimism will outweigh the political negatives, however, remains to be

seen. The Pound opens in Asia this morning having closed in New York on Friday at USD1.4125,

GBP/AUD1.7825 and GBP/NZD1.9335.


What a week for the US Dollar! On Thursday evening, you’d have been offered very long odds against the USD ending up on the week yet that’s exactly what happened. Neither President Trump’s State of the Union Address nor a somewhat more hawkish FOMC Statement could offer any support to the currency. It opened on Monday with its index against a basket of major currencies at 88.75, hit a best level of 89.25, but by Thursday evening was down at just 88.27; just a tiny fraction above its Davos low.



On Thursday, the incoming data – manufacturing PMI, construction spending and jobless claims -

were very strong indeed and 10-year US bond yields were by then decisively up through 2.70%. But,

having spent all week completely ignoring very strong incoming economic data and being totally

unmoved by higher US bond yields, it was not until Friday that the USD finally snapped higher on after

the employment report showed that average earnings growth had risen to 2.9%; the highest since

2009. Non-farm payrolls were only around the average of the previous 12 months at 200,000 and the

average workweek actually fell. But, with the bond market acutely sensitive to signs of inflationary

pressure, the earnings number sent 10-year Treasuries up to 2.84%; a huge rise in yields of 38bp since

the beginning of the month.



With bond yields surging, stocks tumbling and the Atlanta Fed publishing updated estimates of its Q1

GDP forecast to show 5.4% - the highest since Q1 2012 – the US Dollar finally caught a bid on Friday.

Its’ index against a basket of major currencies was already a couple of tenths higher during the

European morning, but after the employment report was published it jumped to a high of 89.00

before settling into the New York close around 88.90. As well as a new Governor of the Federal

Reserve Bank, there are plenty of his colleagues scheduled to speak later this week. Even arch-dove

Kashkari on Friday noted that he saw inflationary signs in the labour data and it will be interesting to

see if the speakers have soothing words for stock market investors or focus, instead, on the continued

normalization of US monetary policy.


The euro had a week full of very positive economic news and, crucially, no attempt from anyone on the ECB Council to try to talk it lower – other than the usual boilerplate language about excessive volatility which traders have learned to take in their stride. EUR/USD began the week around 1.2425 and having been as low as 1.2345 and as high as 1.2515, it finished on Friday at 1.2455 as it withstood the USD surge better than most of the other major global currencies we follow closely here.



Economic news in Continental Europe continues to be extremely positive. Real GDP in the Eurozone

rose 0.6% q/q in Q4, slowing slightly from an upwardly-revised 0.7% in Q3, in line with the consensus.

It was the 19th consecutive quarter of growth in GDP and put the euro region’s 2017 expansion at

2.5%. That’s better than had been anticipated by the European Central Bank, and it’s a pace the

region hasn’t seen since before the financial crisis in 2008. Inflation continues to lag well below the

ECB’s target of “close to, but just below 2%” but there was a big rise in France last month which offset

some of the softness in Germany. Oil prices and a rapid pass-through into CPI through petrol prices

are now perhaps key to near-term progress towards the inflation target.



This Monday morning in Europe brings the service sector purchasing manager surveys and traders will

be looking to see if the strength in manufacturing has been replicated elsewhere in the economy. The

EUR opens in Asia having closed in New York on Friday evening at USD1.2455, AUD/EUR0.6360 and

NZD/EUR0.5865.


The Canadian Dollar began last week around USD/CAD1.2325 and the pair initially moved higher to 1.2375 on Tuesday on concerns about NAFTA and what might be said in the State of the Union speech. President Trump’s speech didn’t once mention Canada directly, however, and there were plenty of sighs of relief north of the border that NAFTA talks didn’t completely collapse. Trade ministers from Canada, Mexico and the United States ended the sixth round of NAFTA negotiations in Montreal, agreeing some progress was made but acknowledging that tough challenges still lie ahead to strike a new deal.



Prime Minister Justin Trudeau warned the United States on Friday that Canada "will not be pushed

around" on trade negotiations and Reuters reports that Trudeau again warned US negotiators that

Canada could walk away from the agreement if its terms are not met. “We will not be pushed around.

At the same time, we can remain confident about NAFTA…“The negotiations are complex and

challenging ... I’ve said many times, we are not going to take any old deal. Canada is willing to walk

away from NAFTA if the United States proposes a bad deal.”



On Thursday evening, after a good set of monthly GDP numbers and a particularly strong

manufacturing PMI report, USD/CAD was down at 1.2260; its lowest level since September 19th.

Immediately prior to the US employment report on Friday, the pair was at 1.2310. Yet, by the end of a

pretty wild week across asset classes around the globe, USD/CAD was at its highest level in ten days.

The final readings for the Canadian Dollar on Friday evening in North America were USD/CAD1.2425,

AUD/CAD0.9840 and NZD/CAD0.9075.