Data Kills the Kiwi

Market Drivers May 06, 2015
New Zealand labor data misses badly
UK PMI Services better 59.5 vs. 58.6
Nikkei Closed Europe 1.01%
Oil $61/bbl
Gold $1191/oz.

Europe and Asia:
NZD Employment 5.8% vs. 5.6%
AUD Retail Sales 0.3% vs. 0.4%
GBP UK Services PMI 59.5 vs. 58.6
EUR Retail Sales -0.8% vs. -0.4%

North America:
USD ADP 09:15
CAD Ivey PMI 10:00

Another seesaw night in the currency market as majors spend the Asian and European sessions mainly rangebound, as the dollar failed to get any traction. On the macro front the kiwi was the big loser of the night slipping more than 100 points off yesterday's highs in the wake of weak employment data that sent many analysts to forecast one and possibly two rate cuts from the RBNZ before the end of the year.

The employment situation in New Zealand worsened with unemployment rate rising to 5.8% form 5.5% eyed while wages grew only at 1.8% rate versus 2.0% forecast. Taken together with the declining dairy auction prices the data suggests that New Zealand is likely to see a slowdown in growth this year that would allow RBNZ some leeway on easing monetary policy.

With one of the highest interest rates in the Industrialized world, the RBNZ has ample room to lower rates from the current 3.5% benchmark level and several banks have already predicted that RBNZ may start doing so as early as June. Certainly the tepid rate of wage growth should offer New Zealand policy makers some measure of comfort that any easing action will not be inflationary.

The kiwi therefore is likely to remain under pressure and could drift towards the .7200 level over the next several weeks, especially if US labor data continues to show strength giving markets confidence that the Fed will act by September. The kiwi has been a major beneficiary of the interest rate spreads between US and New Zealand, attracting strong carry trade flows. If US yields continue to rise it will now become the primary victim of the compression in those spreads.

Elsewhere in UK the PMI Services report provided the first ray of light in several weeks of downbeat data as it beat forecasts printing at 59.5 versus 58.6. The data however showed that prices received were the lowest in more than 3 years suggesting that inflationary pressures are subdued which is likely to provide BOE with more time to maintain its neutral bias. Nevertheless, cable rallied on the news popping back above the 1.5200 level by late morning London trade.

In North America the market will get a look at the ADP report with players looking for approximately 200K new jobs. Any reading near that level should provide the buck with modicum of support but the session may be as volatile as yesterday. With european yields spiking wildly, economic data has clearly taken a back seat as fixed income markets continue to dominate flows in FX.