NZD/USD hold above key 0.7130 level post-strong NZ jobs data as focus turns to Fed

• NZD/USD is currently trading at 0.7140, having bounced from its 200DMA on Tuesday, aided by strong NZ jobs numbers.
• The main driver of FX market price action on Wednesday is set to be the Fed meeting.

NZD/USD recently broke back to the north of an area of prior support turned resistance at 0.7130 in recent trade, as the currency benefits from the tailwind of a stellar Q3 jobs report released in early in the Wednesday Asia Pacific trading session. Dip-buying, when the pair hit its 200DMA at 0.7100 on Tuesday, may also have helped it recover, and with the pair now changing hands at around 0.7140, it is holding onto gains of about 0.4% on the day, making the kiwi the best performing G10 currency on the day.

Trading conditions in broader FX markets are quite subdued, however, and this is likely to cap further NZD/USD gains over the coming hours, with market participants now in wait and see mode ahead of the Fed’s latest monetary policy announcement at 1800GMT, followed by the usual press conference 30 minutes later with the Fed Chair Jerome Powell. A smattering of US data releases between now and the Fed event might be of some interest to FX traders, though most will likely still refrain from placing any big bets just yet.

On the topic of US data; ADP (a major US payroll processing company) just released their monthly estimate of employment change and think that the US economy added 571K jobs in October, more than the 400K added jobs analysts had been expecting their data to show. Over the last few months, ADP has had a mixed record when it comes to predicting the actual non-farm payrolls (NFP) number released by the US Bureau of Labour Statistics, but in wake of the strong ADP number, some economists might be inclined to revise slightly higher their estimate for the official NFP number. The median economist for Friday’s payroll number is currently 450K.

USD has not reacted to the data, thus NZD/USD remains close to 0.7140. It will be worth keeping an eye on upcoming the release of the final October Markit Services PMI survey at 1345GMT and then the release of the more widely followed ISM Services PMI survey, also for October, at 1400GMT.

Strong Kiwi Jobs

According to the Household Labour Force Survey (HFLS), the unemployment rate in New Zealand dropped to 3.4% in Q3, down from 4.0% in Q2, a much larger decline than any economists or local banks had been expecting (both Westpac and ANZ had seen a drop to 3.8%), despite a Covid-19 outbreak leading to the imposition of a national lockdown and localised lockdowns of varying degrees of strictness continuing since. That took the unemployment rate to its lowest since Q4 2007, prior to the global financial crisis. There were also signs of building wage pressures, with labour costs up 0.7% QoQ and rising to 2.5% YoY, while average household earnings were up 1.2% on the quarter. The participation rate also sharply to 71.2% from 70.5% in Q2, as improving labour market prospects attracted workers back to the labour market.

The strong data supports the case for the RBNZ to continue with its policy of the gradual removal of monetary stimulus (i.e. 25bps rate hikes at each meeting) and might even embolden some of the more hawkish members to argue that this pace of rate hikes out to be accelerated. The unemployment rate is now well below the RBNZ or any other economists estimate of NAIRU, which is the estimate of the “natural” rate of unemployment below which wage driven inflation pressures will start to build, and with inflation already near 5% YoY in Q3, the RBNZ will be keen to act to prevent longer-term measures of inflation expectations from becoming deanchored.