cross markets data reaction

New Zealand Employment Report Disappoints, NZD to Retrace Gains?

Wednesday, 07 February 2007 21:47:30 GMT  |  David Rodriguez and John Kicklighter, Currency Analysts

New Zealand Unemployment Rate (21:45 GMT; 16:45 EDT)

Actual:                                   3.7%

Consensus:                          3.7%

Previous:                              3.8%

How Did The Markets React?

The New Zealand unemployment rate fell through the end of 2006, but the headline improvement actually masked the fact that the economy saw fewer jobs within the same period. Looking at the underlying figures, Total employment actually fell by 2,000 while the labor market participation rate fell to its lowest since Q4, 2005. As can often occur with key data releases, markets posted sharp reactions to the headline number, while subsequent price action may look to correct on a closer examination of economic figures. This correction is already visible in New Zealand 10-year bond yields, which initially gapped higher before moving lower in the minutes to follow. The New Zealand dollar has yet to erase its instantaneous gains, however, providing risks to the downside through the early Asian trading hours. Currency traders clearly hope that a falling unemployment rate will boost the likelihood of higher interest rates through upcoming RBNZ meetings, but it is not entirely evident that today’s data supports monetary policy hawkishness in upcoming commentary. 

Bonds – New Zealand 10-Year Bond Yields

New Zealand bond yields initially gapped higher in the moments following the employment data release, but a subsequent correction saw them lower through the Sydney open. As we have previously argued, fixed income markets tend to show the clearest and most “correct” reaction to fundamental news—forecasting short-term price movements in other financial asset classes. Bond traders have the most uncomplicated view of economic developments, as their main concerns are the future of domestic inflation and subsequent interest rate expectations. In this sense, we should view bond yields as a clear indication that initial Kiwi bullishness may be short-lived. This suggests that the NZDUSD is much more likely to move lower in upcoming trade, providing a solid opportunity to profit off of this economic data release.

 

FX – NZD/USD

Short-term currency traders rallied behind the immediate pop in the kiwi following the release of Statistics New Zealand’s fourth quarter employment statistics. Tension underlying the New Zealand dollar has built up considerably in the past few days. In the span of just two few weeks, NZDUSD has broken a nine-month trend line and subsequently found temporary support on the rising 100-day SMA. Most of this technical action has been rooted in speculation surrounding the RBNZ’s next move. On January 24th, the market was turned on its head when Governor Alan Bollard decided to keep interest rates unchanged while simultaneously keeping his usual hawkish rhetoric in the post decision repertoire. After this turn, hawks have grown even more confident in pricing in hikes, while the increasing ranks of the doves have begun to hone in on negative economic data to justify their outlook.

With today’s employment report, both sides had something to hold onto. Since the kiwi was already tracing out a rebound from last week’s plunge, the improvement in the headline jobless rate offered an immediate stepping stone for bulls. In typically inactive hours, NZDUSD rallied 30 points in only a few minutes. However, follow through was considerably less aggressive. Wading into the actual numbers, the unexpected jump in employment came on the combined efforts of fewer people in the labor pool and a 1.3 percent jump in part-time jobs. Both of these factors are detrimental to future growth; and this fact was not lost on position traders. After the initial correction though, the kiwi bids continued to flood into the market. As the rebound off of 0.68 matures, the clash between the forces of equilibrium and the carry-trade potential will but heads once again.

 

Equities – New Zealand Stock Exchange 50 Index

Like traders in the currency and debt markets, those in equities were familiar enough with the current rate regime to know that all data should be filtered through interest rate expectations. The fourth quarter employment data was a perfect example of this necessary habit. Already boosting an unusual level of importance through its infrequent release, the headline number itself threatened unwanted hawkish rhetoric from RBNZ Governor Bollard.  According to the data, the jobless rate unexpectedly dropped to 3.7 percent. While this was a modest shift following the third quarter’s ballooning (and would otherwise be considered a boon for domestic spending and therefore revenues), it has been leveraged psychologically by the outlook for interest rate policy. In the last rate meeting, the policy head warned that he may move in with yet another rate hike should consumer spending not wane naturally. As employment rebounds and energy prices at the consumer level even out, traders become increasingly aware of the central bank’s vigilance. In the minutes following the open of the New Zealand Stock Exchange, the benchmark index dropped over 26 points with little sign of stalling.

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