NZD/USD rebounds to upper 0.6500s as risk appetite improves, US and NZ jobs data, Fed speak eyed this week

• NZD/USD is enjoying a modest rebound from the 14-month lows it struck last Friday amid better risk appetite.
• NZD/USD traders will have plenty of US data, Fed speak, and Q4 NZ jobs data to monitor this week.

A more risk-on mood in global equity and FX markets at the start of the week has facilitated a rebound in NZD/USD from last Friday’s 14-month, sub-0.6530 lows, with the pair trading about 0.6% higher on the day around 0.6575. Amid the better tone to risk and ahead of a week packed full of key US data releases, the US dollar is taking a breather following last week’s outsized rally (the biggest one-week move higher in seven months). As far as NZD/USD traders are concerned this week, Friday’s official US labour market report is the main risk event. Any signs of growing wage pressures and further reductions in labour market slack could further pump Fed tightening bets and prompt further USD strength, adding downside risks for NZD/USD.

Traders may not have to wait for Friday for a pumping of tightening bets; a smattering of Fed policymakers will be publically orating this week, starting with Fed’s Ester George, Mary Daly and Raphael Bostic later on Monday. The latter already hinted over the weekend that, should the data warrant it (i.e. inflation not subside), he would be open to a 50bps move or more than the three rate hikes he currently expects in his base case. Other US data is less likely to shift the dial. The latest Chicago PMI for January was stronger than expected but didn’t seem to faze FX markets and it may be a similar story for the ISM PMI surveys on Tuesday and Thursday.

While risks do seem tilted towards a stronger US dollar from a fundamentals standpoint, technicals, particularly with regards to NZD/USD, may be pointing in the opposite direction. Admittedly, the pair didn’t quite hit the 0.6500 level (support from August 2020) which many medium-term bears will still be targetting, suggesting further downside remains on the table. But the 14-day Relative Strength Index (RSI) on Friday fell to its lowest since early December at just above 24.00, signaling the currency pair had become oversold (in the short-term, at least). Looking at the performance of the pair in the post-pandemic period, every time the RSI has fallen to the 30 area or below, this has been a leading indicator of near-term consolidation.

Couple with the above with hawkish calls from NZ-based Kiwibank for the RBNZ’s Official Cash Rate to hit 2.5% by November 2020 (a total of seven 175bps of tightening) and the case for a further large drop is substantially weakened. Q4 2021 New Zealand Labour Market data on Wednesday, if it shows an even greater tightening of the country’s labour market, could thus offer the beleaguered kiwi some much-needed support via RBNZ tightening bets. Note that at 3.4% in Q3, the New Zealand unemployment rate was already substantially lower than levels seen (by economists and the RBNZ) as consistent with long-term price stability.