Friday turned out to be unexpectedly vicious for currency markets.
A (very) soft US wage print triggered 100pt rallies in NZD and AUD, which had been on the decline.
Those gains were halved later in the session, and most major currencies closed near their starting positions on Friday morning.
The US Employment Cost Index (ECI) does not usually attract much attention, and investors would have had their eyes on the closely-watched Chicago PMI, due an hour later.
But the ECI unexpectedly collapsed to its slowest pace on record. The USD had been on the up across most major currencies, but was violently sold on the result.
EUR/USD jumped from below 1.10 to above 1.11, before reversing those gains.
The market can be forgiven for being a little flighty on any data related to the Fed’s (dual) employment and inflation mandates, just a month and a half from the real possibility of a Fed Funds hike.
But the scale of currency moves on Friday is slightly disconcerting, and will up the ante on an already highly-anticipated payrolls report this week.
The USD recovered most of its ECI-related losses, as analysts pointed out the slump was driven by a sharp drop in sales incentives.
Wages ex-sales incentives were +2.0% Y/Y after 2.1% in Q1 and 1.8% a year ago, so broadly consistent with the average hourly earnings reading in the last employment report.
Also soothing the generally USD-bullish market were comments from St Louis Fed President Bullard, who shrugged off the ECI report.
He told the WSJ that “we’re in good shape” to lift rates at the Sep 16-17 FOMC gathering and suggested that, at last week’s (July) meeting, the Fed wanted to see how the subsequently-released Q2 GDP data shaped up before clearing the way to act. We remain USD bulls, and expect a September lift-off in the Fed Funds Rate.
NZD/USD suffered whiplash similar to its peers. Having sunk below 0.6550 before the ECI report, it was flung above 0.6650 in the immediate aftermath, before drifting back below 0.65.
We remain negative on NZD, with this week set to remind the market about local pain points.
In particular, we look for NZD-negative outcomes from the dairy auction (early Wed am) and the Fonterra payout update (Fri). The local Q2 employment report is also due.
We expect rallies in NZD to be met with selling interest.
Offshore, it is a big week on the data front. In Australia, there is the RBA’s policy decision (Tue), attendant Statement on Monetary Policy (Fri), and the labour market report (Thu). The BoE’s Inflation Report (Thu) will be interesting. There’s plenty on the US calendar through the week, but the keen focus is on the employment reports (Fri).
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Raiko Shareef is on the BNZ Research team. All its research is available here.