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The Biggest Divergence in FX Today

The Biggest Divergence in FX Today

Boris Schlossberg, Technical Strategist

Economic performance and monetary policies in Australia and New Zealand are now on vastly divergent paths, and the New Zealand dollar is soaring while the recent Aussie recovery falls on hard times.

It was night of marked contrasts in Asian session trade as the two Tasman Sea neighbors went their separate ways, with NZDUSD soaring in the wake of the Reserve Bank of New Zealand (RBNZ) meeting that hinted at a rate hike in 2014, while AUDUSD dropped more than 100 points after Australian labor data missed expectations by a very wide margin.

See related: A Central Bank Policy Like No Other

In New Zealand, the RBNZ kept rates on hold, as expected, but noted that it is likely to raise rates in 2014. The central bank stated that the global growth outlook is mixed, with GDP growth in China and Australia slowing.

Nevertheless, the RBNZ is greatly concerned with the bubble building up in the nation’s housing market, stating that it does not "want to see financial or price stability compromised by continued high house price inflation. Restrictions on high loan-to-value residential mortgage lending, which will come into effect next month, are expected to help slow the national housing market."

There is concern among New Zealand monetary policymakers that these "macroprudential controls" are not working as well they should be, and therefore, the authorities may resort to a rate hike to clamp down on asset price inflation.

The RBNZ may do so despite concerns that the New Zealand dollar (NZD) exchange rate remains high, thus hurting terms of trade. RBNZ Governor Graeme Wheeler repeatedly stressed that point yesterday, but the currency market ignored the jawboning and bid NZDUSD to fresh weekly highs of .8150.

Woeful Labor Data Tanks Aussie

Meanwhile, just across the water, the situation in Australia was strikingly different as Australian labor data disappointed the market, missing as the economy lost jobs in August despite anticipated gains. Employment contracted by -10.8K versus 10K expected, and the underlying data was even worse than the headlines, with full-time employment losing another -2.6K after a loss of -6.7K in July. Part-time jobs declined -8.2K versus -3.5K in July.

The Australian unemployment rate printed at 5.8%, as expected, but that was only because labor participation shrunk to 65% from 65.2% expected. This was the lowest level of participation since 2007, clearly suggesting that the great Australian economic boom is over.

The news put a serious crimp in the AUDUSD recovery rally, with the pair dropping to a low of .9233 in the aftermath of the release. The Australian dollar (AUD) has been a relatively strong performer over the past week or so, as concerns over the hard landing in China and further rate cuts from the Reserve Bank of Australia (RBA) receded from the market.

However, today’s weak labor data puts the issue of rate cuts back on the table. With demand likely to contract as employment conditions deteriorate, the RBA may have no choice but to accommodate further before the end of this year, and such a move could put further downward pressure on the Aussie.

Problem Data from the Eurozone, too

Meanwhile, in Europe, the economic calendar was relatively quiet, but the sharp drop in EU industrial production kept EURUSD on the defensive, with the pair dipping back below the 1.3300 level. Industrial production fell by -1.5% versus -0.1% expected with a particularly bad reading out of Italy.

The news shows that the Eurozone recovery remains hesitant and uneven, which in turn is likely to keep the EURUSD confined to its current range.

The Lone US Data Point for Today

In North America today, only US weekly jobless claims are due, and claims are anticipated to rise to 332K from 323K the month prior. The weekly claims have been on a steady trend lower and have been one of the key supporting points for the US economic recovery.

If today's data shows a marked deterioration, USDJPY could come under further selling pressure with the pair targeting the 99.00 figure as the day progresses.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.