NZD/USD pares losses and approaches 0.5900 ahead of the US NFP release

New Zealand Dollar appreciates 0.5% to 0.5875 but remains on track for a moderate weekly loss.
The US Dollar loses ground across the board as bets of Fed cuts rise ahead of the US NFP release.
Hopes of further RBNZ monetary easing are keeping Kiwi rallies limited.

Guillermo Alcala FXStreet

The New Zealand Dollar reverses previous losses on Friday, buoyed by a mild appetite for risk and the US Dollar’s weakness as investors take positions for a soft US Nonfarm Payrolls report that would consolidate hopes of Fed interest rate cuts.

The NZD/USD pair is trading at the 0.5875 area ahead of Friday’s US session opening, after bouncing from 0.5835 on Thursday. The broader trend, however, remains neutral, with the pair trading sideways within a 100-pip range below 0.5930.

Weak US data has boosted Fed cuts' hopes

A string of weaker-than-expected employment releases seen earlier this week has underscored the image of a softening labour market, increasing pressure for the Fed to focus on job creation, as inflation pressures remain at moderate levels.

Most Fed policymakers have supported that view to a greater or lesser extent, in some cases calling for immediate rate cuts to support economic growth. The market has reacted, ramping up bets for Fed easing in September, practically fully priced ahead of the NFP release, which has weighed on the US Dollar as of late.

The New Zealand Dollar drew some support from positive service data from China, New Zealand’s major trade partners, but upside attempts have remained limited, as investors price in further RBNZ easing for the coming months. New Zealand’s central bank cut its benchmark interest rate to a three-year low of 3% in late August and hinted at further cuts, citing economic headwinds.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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