Written by Steven Dooley and Shier Lee Lim
Strong NFPs doubted after services employment drop
A stronger than expected US jobs report didn’t have as much impact as expected after another key employment metric tumbled on Friday.
The US non-farm payrolls report beat forecasts for the fourth out of five months on Friday, with 216k new jobs reported in December versus the 170k expected. The unemployment rate held steady at 3.7%, defying expectations for a rise to 3.8%.
However, the ISM services employment index saw the biggest drop since the onset of the pandemic, falling from 50.7 to 43.3.
While the ISM report was bad news for the US economy, it was good news for interest rate expectations, with markets still looking for five Federal Reserve rate cuts this year. US shares gained with the S&P500 up 0.2% on Friday.
The USD index ended flat.
The AUD/USD rebounded from three-week lows to also end flat while the USD/CNH climbed 0.2% to hit one-month highs.
In other markets, the euro and Japanese yen were both steady, while the British pound was moderately higher.
CHF dominance continues for second year
Looking at last year’s FX performances, the Swiss franc has led the league tables for the best performing currency versus USD for the second year in a row.
This is an astonishing number, especially given that the Swiss National Bank has not been as active in raising rates as other G10 central banks – which should have solidified CHF as the funding currency of choice in carry trades.
Furthermore, CHF has rarely been seen as the go-to currency during a cyclical upswing, but it has clearly benefited from the Japanese yen’s decline as a safe haven currency during high volatility periods.
We believe that the process of balance-sheet reduction should slow significantly: the SNB sold nearly CHF300 billion in foreign currency to acquire CHF.
A significant drop in FX sales should be enough to push the CHF downward. Finally, some of the dynamics that should have been CHF-negative, most notably carry, should begin to have a greater influence on CHF in 2024.
Kiwi weakness not helped by higher rates
The New Zealand dollar has fallen recently – down 2.2% from recent highs – giving up gains after the Reserve Bank of New Zealand startled (again) with hawkish modifications to estimates and the OCR track at its most recent policy meeting in 2023.
While the RBNZ is convinced that high interest rates are limiting expenditure and lowering inflation, progress has been slower than projected. We continue to view NZD as facing downside risks. The 3Q GDP contraction was much below the RBNZ’s expectation, and higher frequency pricing indicators indicate to a downside surprise in CPI inflation.
The New Zealand dollar remains weak, owing mostly to fears about China and low dairy prices. Because the RBNZ began its tightening cycle earlier than other central banks, raising the OCR to extremely restrictive levels will likely have a negative impact on GDP — and potentially the currency – in 2024.
FX ends steady after US jobs drive volatility
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 8 – 13 January
All times AEDT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
