After the previous day’s (Lockhart-driven) fireworks, the overnight session was much more subdued.
Major currency performance was mixed, but the USD is bumping up near 10-year highs. NZD/USD briefly made fresh six-year lows below 0.65.
The swathe of service PMIs globally largely failed to inspire any material price action, landing relatively close to expectations.
The US non-manufacturing ISM was the exception. It punched the lights out at 60.2, well above the most optimistic analyst, and at its highest level since 2005.
The outright level probably overstates the strength in the broader economy. But with manufacturing just 12% of US GDP, the upside surprise in last night’s release should more than offset the small downside surprise in the manufacturing survey earlier in the week.
This week’s gains in the USD have taken the broad Bloomberg Dollar Spot Index within spitting distance of the March 2015 high, which was (by far) the strongest level in at least 10 years.
For now, the broader USD’s ascent is being curbed by EUR/USD’s inability to break lower. There is strong support at 1.0820. Clearly, the US payrolls report at week’s end is the biggest threat to that.
NZD/USD slipped below the previous low of 0.6499 in the early hours of this morning, though on any fundamental driver.
The attempt to cause a break of stop-loss selling failed, with NZD recovering back above 0.65.
We remain of the view it is only a matter of time before we see a sustainable break. Topside resistance continues to edge lower, with the top of the trend channel now at 0.6600.
We are wary, though, that tomorrow’s Fonterra payout update and the US employment reports present the last major event risks (for a while) that could drive a major break lower.
We would be looking to reduce our short NZD/USD heading into the week’s close, either by reducing our stop-loss level or even taking profit.
Today’s Australian employment report could incite some volatility. Our NAB colleagues are near the consensus estimate of 10k, but note the potential for upside surprise.
The BoE’s Quarterly Inflation Report will also be worth watching, for signs of fresh hawkishness.
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Raiko Shareef is on the BNZ Research team. All its research is available here.