(02 August 2017)DAILY MARKET BRIEF 1:NZD slides as unemployment report disappoints

The New Zealand extended losses on Wednesday amid the release of disappointing data from the job market. After grinding lower yesterday, NZD/USD fell another 0.55% to 0.7425, its lowest level of the past five days. Despite the fact that the second-quarter unemployment rate matched estimate of 4.8%, down from 4.9% in the previous one, the details do not look that great. The employment change shrank 0.2%q/q (+0.7% expected) in the June quarter, while previous quarter’s print was downwardly revised to 1.1%. The participation rate slip to 70% from 70.6%, while average hourly earnings grew 0.8%q/q, compared to 0.9% median forecast.

That gets to be a lot of disappointing data from the Kiwi economy. The last inflation report already showed that a downside adjust to the forecast may be necessary. This unemployment report could be the beginning of the end of the multi-month rally. Investors are heavily skewed to the upside in NZD/USD with long net speculative position reaching 63.70% of total open position. In addition, the Reserve Bank of New Zealand, which will hold a monetary policy meeting next Wednesday, will likely sound dovish. Indeed, the RBNZ is never tired of emphasizing the excess strength of the Kiwi, even more when economic data are on the slim edge.

In our opinion, the risk is definitely on the downside and a reversal of the NZD/USD is more than likely, especially against the backdrop of extreme speculative positioning.

By Arnaud Masset