NZD rises on improved risk appetite, but remains vulnerable to trade tiff fallout. UK decides to keep EU regulation on industry and ag. NZ swaps higher across the curve

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By Jason Wong

US employment growth was slightly stronger than expected, but with stronger labour force participation, there was a surprise 0.2 percentage point lift in the unemployment rate to 4.0%. 

Along with slightly softer than expected wage inflation, the data suggested no reason for the Fed to become more aggressive with its policy tightening plans. 

The USD, already on the back foot, weakened after the release right through until the close, while US rates fell slightly.

Canada’s labour market report showed similar characteristics, with strong employment growth met with higher participation, a higher unemployment rate and some slippage in wage inflation. The data miss wasn’t seen to be significant enough to prevent the Bank of Canada hiking rates this week, with the probability of a 25bps move up to 87% from 81%.

Germany industrial production was strong in May, as forewarned by factory orders the previous day.

USD indices were down in the order of 0.4-0.5%, so not a big move really, with light trading conditions continuing during the US holiday-shortened week.  The not-too-hot, not-too-cold US employment report and lack of concern about the US-China trade war saw the S&P500 close up 0.8%, taking the weekly gain to 1.5%.

The NZD was a beneficiary of higher risk appetite, which saw it close around 0.6840, just off its high for the week, and some 1½ cents higher from Tuesday’s low when China’s currency as at its weakest.  From a technical point of view, the NZD now looks in much better shape than it did at the beginning of last week although fundamentally it remains vulnerable if US-China trade tensions increase to the next level.  We await some direction from President Trump. The AUD moved higher alongside the NZD, although the kiwi slightly outperformed, seeing the cross end the week on a high note just above the 0.92 mark.

Heading into Friday, there was event risk around GBP as the divided UK Cabinet met for an all-day retreat to nut out an agreement on Brexit to present to the EU.  In the end, PM May seems to have come away a winner, with a soft Brexit plan that would keep close trade ties with the EU after leaving.  The proposal includes a business-friendly UK-EU free trade area which establishes a common rulebook for industrial goods and agricultural products, while different arrangements would apply to services.  GBP ended the week near its high around 1.3290.  GBP might have been even stronger if not for some scepticism that the EU will buy into the UK’s plan.

US Treasuries had a lacklustre session, trading in a 2.81-2.85% range, with the lower end of that range seen after the employment report.  NZ swap rates were 3bps higher across the curve, showing some resistance to push down further after reaching fresh lows earlier in the week.

The economic calendar is bare in the day ahead and it might be a quiet day ahead.  The only notable news over the weekend was US secretary of State Pompeo gaining little from a trip to North Korea. The US was accused by Pyongyang of “robbery” and “gangster-like” demands. It shouldn’t come as a surprise, simply confirming the scepticism of most that little much will change after a lack of specifics was revealed in the post Kim-Trump summit agreement signed last month. 


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