NZD/USD wilting as the greenback embarks on a come back ahead of RBNZ

NZD/USD is starting out the week below structure although in a correction of` Friday's New York sell-off to the 0.6580 lows.

The greenback's recovery extended on Friday's Nonfarm Payrolls jobs data which beat expectations. 

The key takeaways in Nonfarm Payrolls that another 1.8 million in July came with the Unemployment Rate falling to 10.2% while the hours worked were still down 9% vs. pre-pandemic; with concerns linger over the long-run outlook.

This came US/China tensions flared up, lending further support to the US dollar.

As analysts at ANZ Bank note, the US President Donald Trump announced on Friday that US residents would be banned from doing business with ByteDance’s TikTok and Tencent’s WeChat in 45 days’ time, hitting tech stocks.

The move would affect Apple’s phone sales in China as it would not be able to distribute the ubiquitous, even essential, WeChat app on its phones. To be fair, 45 days is a long time, and the market will hope the ruling is softened. But with an election looming, talking tough on China appears to be the strategy, and markets should probably expect more volatility from this source.

The week ahead

It could be a week of obstacles for the kiwi as investors get set for the Reserve Bank of New Zealand as it delivers a lift in the size of the LSAP QE programme on Wednesday.

There is some uncertainty about where the RBNZ will land on QE, but the greatest room for surprise is likely to be what the RBNZ says on other unconventional monetary policy tools, analysts at ANZ bank explained.

We expect that the RBNZ will keep its options open, with a negative OCR and foreign asset purchases on the table, reaffirming market expectations that a negative OCR next year is a non-trivial possibility (with 25bps priced in by mid-2021), and keeping a lid on the elevated exchange rate.

Most local data has beat expectations of late; while welcome, the longer-term outlook remains highly uncertain and we expect all options – including negative rates and foreign asset purchases to remain on the table.

This all speaks to headwinds for the NZD. 

First up, we have data today in the preliminary read of the ANZ Business Outlook survey for August and China’s PPI and CPI data for July.