NZD/USD probes session highs in 0.6760s as US dollar struggles in wake of mixed US jobs report

• NZD/USD is probing session highs in the 0.6760s as the dollar weakens after a mixed US jobs report.
• The jobs report likely won’t impact the Fed’s tightening plans so USD weakness is perplexing and could be positioning-related.

NZD/USD is probing session highs in the 0.6760s, though the gains are currently capped by the presence of resistance in the form of the Tuesday lows, as the US dollar weakens in wake of Friday’s mixed US jobs report. A break above resistance could open the door to a test of the 21-day moving average just under 0.6790. At current levels, the pair is trading about 0.25% higher and sits around the middle of the G10 performance table. Ahead, a smattering of Fedspeak from the likes of Mary Daly, Thomas Barkin and Raphael Bostic over the course of the afternoon will keep FX traders entertained, though may not provide markets with any impetus.

NFP review

The US economy added less jobs than expected in December (just 199K versus 400K forecasts), but measures of economic slack showed improvement across the board (unemployment fell to 3.9% from 4.2%) and wage growth was solid. The implication is that the labour market is 1) tight and 2) suffering from a lack of fresh workers (hence weak monthly job gain). This is very much in fitting with the way the Fed has been viewing the labour market. Fed Chair Jerome Powell and others at the bank have said they see the pandemic as artificially holding back millions of workers from returning to the labour market, which has upped the competition amongst employers for those workers who are available.

The Fed minutes revealed FOMC participants viewed the US labour market as either already at “short-term” full employment or close to it, amid the expectation it will take some time (and the subsiding of the pandemic) for labour supply to start picking up again. The FOMC minutes also revealed that, as a result of near-term full employment being close, it may soon be time to start raising interest rates, a statement markets took as indicating potential lift-off in March. The latest jobs report will not change any of this thinking, so it is a little odd to see the US dollar weakening.

USD weakness could be a reflection of fears of a Fed mistake. In other words, it could reflect a view that it would be economically optimal for the Fed to wait a little longer before raising rates, as starting the hiking cycle in March could stymie growth and bring down the eventual terminal rate. Given the fact that US bond yields haven't seen much of a post-NFP reaction (you would expect to see lower longer-term yields if there were fears of a hawkish Fed mistake), that may be overthinking it. Perhaps the weakness reflects USD profit-taking in a market already very long dollars. Either way, if the current weakness persists, that could put NZD/USD on course to break back above 0.6800 and have a go at recent 0.6850 highs next week.