October’s US non-farm payrolls punched the lights out; USD gains 1.0%+ against major currencies; soft China trade data may set early trading tone

By Raiko Shareef

Major currencies are at least 1.0% weaker against the USD, after the US employment reports cleared the path to a rate hike in December.

NZD is sitting just above important support at 0.65. In a light data week, we expect the USD to grind higher.

Friday’s US labour market reports were unequivocally strong.

October’s non-farm payrolls growth in particular punched the lights out, at 271k vs 185k expected.

The unemployment rate ticked down to 5.0%, and the widely-followed, broader measure of unemployment (U-6) fell to 9.8% – in single digits for the first time since May 2008. Wage growth accelerated faster than expected, to 2.5% y/y.

Little wonder that markets moved quickly to make a December Fed Funds Rate hike its central scenario. We concur. Barring another equity market and/or emerging markets meltdown, FOMC Chair Yellen will more than likely deliver on a long-signalled intention to begin the tightening cycle before end-2015.

On that note, it was relatively encouraging to see US equity indices broadly hold their ground on Friday, despite predictable softness in rates- and USD-sensitive stocks. Investors were at least partly encouraged by the strength of the US economy. It will be interesting to see how Asian markets fare this morning – will they bristle at the prospect of a renewed bout of EM capital outflows? These will be an early-week guide for NZD.

We try and refrain from giving blow-by-blow coverage of FOMC members on the speaking circuit. The response of those post-payrolls was relatively predictable. We were interested  to hear from San Francisco Fed President Williams that the October statement’s reference to the “next meeting” was a deliberate step back toward calendar-based guidance.

In short, the FOMC wanted to discourage the market’s idea that a December lift-off was completely off the table (a view that had gained momentum after September’s weak payrolls report).

NZD/USD starts the week on the back foot, struggling to keep its 0.65 handle. That marks a significant support level, even before the post-payrolls sell-off bounced off it. We expect the USD to grind higher, especially in the early part of this week, with few cues on offer from the events calendar. China’s soft trade data over the weekend will contribute to the downbeat tone for NZD.

Looking ahead, Australia’s NAB business survey (Tue), China’s monthly data dump (Wed), Australia’s labour market report (Thu), and US retail sales and consumer sentiment (Fri) will be highlights.


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Daily exchange rates

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Raiko Shareef is on the BNZ Research team. All its research is available here.