NZD/USD erases kneejerk post-NFP gains, prints fresh 13-month lows under 0.6770

• NZD/USD has erased a kneejerk move higher following the weaker than expected headline NFP number.
• The pair is now probing annual lows around 0.6770.
• The latest jobs report signals underlying strength in the US economy and the US dollar looks in a good position.

NZD/USD saw kneejerk upside in response to the latest US labour market report, which on the face of its was much weaker than expectations. The pair nearly hit session highs in the 0.6810s but has since reversed back to below pre-data levels. It recently broke out to fresh annual lows under 0.6770, where it now trades with on the day losses of about 0.75%.

The Bureau of Labour Statistics (BLS) headline NFP number was weaker than expected a just 210K (the median forecast was for 550K). Moreover, Average Hourly Earnings growth was a tad weaker than forecast. But the separate Household survey also compiled by the BLS showed the unemployment rate falling to 4.2%, much larger than the expected drop to 4.5% from 4.6% and also showed the participation rate rising to a fresh post-pandemic high at 61.8%. That meant, according to the Household survey, there were over 1M more employed persons in the US economy in November versus October.

In sum then, the data was mixed but broadly still supports the idea that the US labour market is in good shape and continues to recover. As a result, Fed rate hike expectations for 2022 have actually risen. The implied yield on the December 2022 three-month eurodollar future (a proxy for market expectations as the where the Fed funds rate) rose to 1.05%, more than 25bps above earlier weekly lows and only a few bps below recent pre-Omicron highs at 1.08%.

Further hawkish Fed commentary, this time from St Louis Fed President James Bullard, who will be a voter in 2022, is likely adding tailwinds for the US dollar also. The 0.6800 area was a key support zone for NZD/USD, so a weekly close to the south of this level might be taken as a bearish signal by technicians heading into next week. Should technical selling momentum pile up, NZD/USD could tumble all the way down to the 0.6500s, the next area of major support.