The USD has strengthened across the board.
The NZD and NOK have been the weakest performers over the past 24-hours.
There was a trifecta of events that propelled the USD higher against most of its peers overnight.
First, the US ADP employment report failed to provide any negative surprise, coming in fractionally above expectation. Second, the US Services PMI and US ISM non-manufacturing index surprised positively. The latter, at 59.1, was close to its highest level in a decade. Its shows that the US services sector is doing well, even as the manufacturing sector may be suffering from the stronger USD. Finally, in the early hours of this morning, in her testimony to the House, Chair Yellen, reiterated that Dec was a “live” meeting for a hike. The USD index has pushed up to its highest level since early-Aug.
Risk-sensitive assets took a reasonably sanguine view of proceedings. The S&P500 is only down 0.4%. Emerging market equity indices, fell after Yellen’s comments, but remain up on the night overall. The Fed will become increasingly emboldened in its attempt to finally raise interest rates, if it sees that markets can remain resilient each time it mentions the potential of a Dec hike.
The GBP was boosted late last evening after the release of a stronger-than-expected UK Services PMI. However, it later fell victim to the broad USD strength. It trades at 1.5370 this morning, from intra-night highs above 1.5440. Tonight, the Bank of England will meet. Although no change to its cash rate is expected, any comments, particular from its inflation report, could influence market pricing. It currently prices a 25bps hike by end-2016.
The NOK was hard-hit overnight as the WTI price fell more than 3%, as US government data showed that crude inventories climbed for a sixth week. The NOK declined 1.7% against the USD to trade at 8.6480, its lowest level since early-2002.
The NZD/USD fell sharply yesterday morning after the release of the NZ Q3 employment report. The tick up in the unemployment rate to 6.0% was expected (by BNZ and consensus) but employment growth was softer than expected. That set the NZD on the back foot going into a night of broad USD strength. The NZD/USD broke through support at 0.6620 (Oct lows) and has traded down to 0.6580.
There is not too much on the domestic agenda to drive the NZD/USD into weekend, so its fate will likely lie with the USD’s reaction to Friday night’s US payrolls release. We would not look for near-term NZD/USD support approaching the 0.6500 level.
The NZD/AUD has also extended its recent sharp fall from grace. From 0.9320 yesterday morning, the cross now trades at 0.9210. This is bringing the cross back toward fundamental ‘fair value’ that we currently calculate to be in the 0.88-0.91 range. Today, look out for two scheduled speeches by RBA members, Lowe and Governor Stevens.
There is a heavy smattering of Fed speakers scheduled this evening, but all eyes will likely now be firmly on tomorrow night’s payrolls report.
Get our daily currency email by signing up here:
Kymberly Martin is on the BNZ Research team. All its research is available here.