NZD/USD slides back beneath 0.7200, with bulk of post labour market data gains now gone

• NZD/USD strengthened as high as the 0.7230s during the APac session following strong NZ Q4 labour data.
• As the US dollar has picked up, however, the bulk of these early gains have now faded.

NZD/USD has now given away most of the gains it made during early Wednesday Asia Pacific trade; the pair rallied above the 0.7200 level and hit highs above 0.7220, up from Wednesday FX open levels around the 0.7180 mark. However, after finding strong resistance at last Friday’s high 0.7226, the pair has since lost momentum amid a gradual strengthening of the US dollar and has slipped back beneath the 0.7200 mark.

Driving the day

Strong kiwi performance during the early part of Asia Pacific trade was triggered by a stronger than expected Q4 2020 New Zealand labour market report; in the final quarter of last year, employment in the NZ economy posted a surprise 0.6% QoQ expansion, well above market expectations for a 0.8% drop in the total level of employment in the quarter. Thus, the unemployment rate for the quarter came in at 4.9%, a drop from Q3’s 5.3% rate and well below expectations for a rise to a 5.6% unemployment rate.

According to Capital Economics, “the fall in the unemployment rate… means the rate is already past the peak and we expect the labour market to continue to tighten throughout 2021”. The economic consultancy thinks the unemployment rate will fall to near 4% by the end of 2022.

On the implications for the RBNZ, CapEco notes that the data came in significantly better than the bank’s forecasts. “Our view that the labour market is set to tighten much faster than the RBNZ anticipates is one reason why we expect the Bank to begin raising rates by the end of next year” they conclude.

The currency has lost some steam since the Asia Pacific session amid the aforementioned pick up in the US dollar, but is still one of the best performing G10 currencies on the day.

Looking ahead for the Kiwi, preliminary ANZ Business Confidence data for February will be released at 00:00GMT on Thursday and will garner some attention. But for the most part, NZD/USD focus will return to US dollar dynamics; i.e. focus will be on Friday’s US labour market report, any further progress made towards another round of fiscal stimulus in the US Congress and whether or not the USD continues to grind higher amid what is being touted as an “overdue” short-squeeze.

NZD/USD key levels