Early reports this morning suggest that Macron has decisively beaten Le Pen by about 65-35% in the second round of the French Presidential election, as expected. This sets the scene for positive risk sentiment as the new week begins.
Last week ended with a goldilocks US employment report, with strong employment but soft wage inflation. This did no favours to the USD, but helped contained UST yields, while the S&P500 made its highest ever close.
US employment rebounded slightly more than expected in April, driving the unemployment rate to 4.4%, its lowest level in ten years. Downward revisions to wage data ensured that the annual gain of 2.5% was no higher than it was 18 months ago. And so the puzzle of suppressed wage inflation – a global phenomenon – continued.
Market pricing of a Fed rate hike in June nudged up to a 76% chance, although there was generally little reaction to the data in the rates market, no doubt influenced by the mixed data. Some 37bps of hikes were priced through to the end of the year, up just half a basis point. The 2-year Treasury rate ended the day up half a basis point to 1.31% while the 10-year rate closed half a basis point lower at 2.35%, little changed from the NZ close.
Fed Chair Yellen and vice-chair Fischer didn’t comment on the US economic outlook in their scheduled speeches. In an interview after his speech, San Francisco Fed President Williams (non-voter) said his outlook for three or four rate increases in 2017 hasn’t shifted. In his speech he argued that the Fed and other central banks should adopt price-level targeting. This would allow central bankers to guide inflation above their targets for a time to make up for past undershoots, or vice versa.
In the currency market, the USD steadily fell after the employment report. A modest recovery in oil prices after a chunky fall over recent days helped support CAD and NOK. There was talk of OPEC extending its production controls for a further six months, with this week’s 6+% fall in oil prices likely to encourage such a move.
The NZD ended the week on a healthier note, closing up 0.7% for the day at 0.6920. As we’ve previously noted, the NZD looked oversold, falling against the trend of supporting fundamental factors such as near-record terms of trade. The fact that the RBNZ’s measure of 2-year inflation expectations rose 25bps to 2.17% did the currency no harm. The Bank is likely to publish a much higher inflation track in this week’s MPS, after actual inflation came in much higher than the Bank expected, and it factors in variables like the improved terms of trade and weaker NZD. That will support a higher rate track earlier than the Bank previously projected.
With the NZD outperforming on Friday, it was higher on all the major cross rates. NZD/AUD drove up through the 93 mark, closing the week around 0.9320, as further falls in iron ore prices kept the AUD soft.
EUR touched 1.10 and ended the week around that mark ahead of the second round of the French presidential election. It probably would have moved higher, but traders were reluctant to go into the weekend with long positions in case of a shock Le Pen victory that could have sent EUR careering towards parity.
The yen was the weakest of the majors as it continues to unwind the strong rally seen mid-March when geo-political fears escalated. NZD/JPY ended the week around 78.
The start to the week should be fairly quiet. There was little change in local rates on Friday and the short end of the curve should remain in a tight range until Thursday’s RBNZ MPS.
Get our daily currency email by signing up here:
BNZ Markets research is available here.