It is going to be a very a slow day as most markets are closed for Labour Day. Only Australia, New Zealand, Denmark, Israel, the United Kingdom and the US are open for trading today. Despite the fact that the majority of traders are taking a day off, equities continued to climb to all time high in the US. The S&P 500 closed above the 2,940.9 threshold for the first time since September 21 2018, with futures edging higher this morning; we’ll most likely see another record high today. In the UK, equities were also gaining ground, while the pound sterling climbed back to 1.3055 against the greenback amid easing Brexit fears.
The Kiwi was the biggest mover in the Asian session amid a disappointing job report that hinted at a possible rate cut from the RBNZ. NZD/USD fell as much as 0.70% to $0.6629 after data showed that employment growth contracted 0.2% in the first quarter – versus median forecast of +0.5% and +0.1% in 4Q 2018 – while on a year-over-year basis employment growth increased 1.5% versus 2.2% expected and 2.3% in the previous quarter. However, the unemployment rate eased to 4.2% from 4.3%, thanks to a contraction in the participation rate, which eased from 70.9% to 70.4%.
The treasury market reacted moderately to the news, while money market rates rose. According to overnight indexed swap (OIS), the probability of a rate cut at the next meeting increased from 39% on Tuesday to 59% this morning. For the June meeting, the likelihood of a cut has jumped from 59% to 71%. The Reserve Bank of New Zealand is one of the central banks that has the leeway to cut interest rates to spur economic growth, while at the same time trying to give a lift to inflation. Given the slowdown in economic growth, stalling wage pressure and anaemic inflation pressures, we believe that a rate cut remains a live possibility.
Even though, the Federal Reserve would most likely adopt a dovish stance at its meeting today, we believe that the RBNZ would lean towards more accommodative monetary policy in a more aggressive way. Therefore, we anticipate that there is room for further Kiwi weakness with $0.65 as medium-term target.
CAD pending ahead of Fed decision
After losing as much as 1 % against the greenback following the Bank of Canada (BoC) meeting, the loonie has been retracing back, bouncing by 0.70%. Yet major questions arise as both today’s FOMC rate decision as well as Canadian manufacturing PMI come into play. It is therefore very likely that the CAD should continue its progression.
Last Wednesday, the BoC lowered its growth forecast for 2019 from 1.70% to 1.20%, removed its wording concerning future rate hike and starts considering accommodating monetary policy, turning towards a more data dependent approach. Although the Canadian economy remains in a good situation, with inflation close to the 2% target, a tight labor market and vivid domestic consumption, the manufacturing sector remains in pain. However, the situation is expected to improve for the 2Q 2019 while Canadian manufacturing PMI should have progressed in April (consensus: 51.5; March: 50.5). Nevertheless, the evolution of today’s trading session will be mainly skewed towards Fed’s meeting. The key question is whether it will consider strong growth and a tight labor market as the main factors for attention or if weakening inflation should be addressed in its coming forward guidance. It seems more likely that it will stick with current dovish bias, stating that the risk of a global recession is quite lively.
Currently trading at 1.3393, USD/CAD is heading along 1.3350 short-term
