- NZD/USD has recovered back to the north of 0.7100 despite strong US data.
- Significant widening of NZ/US rate differentials in recent weeks is likely playing a supportive role.
NZD/USD has been gaining ground in recent trade, despite the release of a very healthy US labour market report for the month of October earlier in the session, which the US dollar has so far failed to capitalise on. The pair has moved back to the north of the 0.7100 level in recent trade, meaning its has moved back to the north of its 200 and 21-day moving averages again, both of which sit just below the psychologically important level.
Looking at the lay of the land in FX markets on the final session of the week; NZD is one of the best performing G10 currencies on the day, behind only JPY and SEK and currently trades higher versus the dollar by about 0.1%. NZD might be holding well versus the dollar despite strong US jobs data because New Zealand too reported jobs data this week, and it showed the New Zealand economy in much better health than the US. By comparison, in Q3 of this year, the New Zealand unemployment rate was 3.4% versus 4.6% in the US in October. That is well below most estimates of full employment and fully justifies the RBNZ’s stance that gradual withdrawal of monetary stimulus via rate hikes is appropriate moving forward. That contrasts to the US, where the Fed said earlier in the week it is not yet ready to hike interest rates given the labour remains some ways off full employment.
Looking at STIR future markets for next December, which act as a proxy for where markets believe Fed and RBNZ interest rates will be 13 months time, it can be seen that, since the start of October, New Zealand markets have moved to price in almost 100bps in additional rate hikes. That compares to US markets, which have, since the start of October, moved to price in an additional 25bps of rate hikes. That corresponds to New Zealand 10-year bond yields moving 50bps higher to above 2.50% over the same time period, versus US 10-year yields, which are flat vs early October levels at around 1.45%.
It’s a big week for US markets next week with October Consumer Price Inflation metrics set for release, while the New Zealand economic calendar is benign. Nonetheless, it wouldn’t be crazy to assume that rate and STIR market differentials could continue to support the kiwi going forward.