NZD/USD stabilises in 0.6750 area as post-hawkish Fed minutes selling subsides, bears eye test of 0.6700

• NZD/USD has stabilised in recent trade in the 0.6750 area after being hit after risk-appetite deteriorated post-hawkish Fed minutes.
• Risk appetite and USD flows will remain the key drivers in the days ahead.
• A break below the 0.6750 region would likely see the pair drop back to test 0.6700 again for the first time since mid-December.

NZD/USD has stabilised in the 0.6750 area as global risk appetite settles following Wednesday’s sharp post-hawkish Fed minutes deterioration. As US (and global) equities sold off on Wednesday, led by duration-sensitive big tech and growth names, risk-sensitive currencies like NZD were hit. As a result, NZD/USD dipped all the way from the 0.6820/30 area to current levels around 0.6750. The pair is now roughly 1.3% below Wednesday’s highs near 0.6840 and is about 0.7% down on the day, the pair having lost a grip on its 21-day moving average close to 0.6790 during Asia Pacific trade.

NZD/USD focused US themes

Amid an ongoing lack of domestic economic events/fundamental developments worth noting in New Zealand to drive the pair, risk appetite and dollar flows are likely to continue to reign supreme. Hawkish Fed minutes and the associated move higher in US yields and lower in US (and global) equities aside, another key point of focus this week has been US data. For the most part, the data out so far this week has been ignored. On first glance, the December data this week has been mixed to poor; yes, ADP was strong, but both headline ISM survey indices missed forecasts and JOLTs showed a drop of about half a million in job openings as opposed to an expected rise.

But digging a little deeper reveals a few key trends. Firstly, a record number of quits in November, as shown by the JOLTs data plus survey participant comments about the state of the US labour market suggest that the worker/skills shortage continues to bite, adding upside risks to wage inflation. Secondly, the ISM surveys revealed that while supply chain disruptions continue to hamper output, they are at least beginning to ease, with the manufacturing survey seeing a large associated drop in the price paid subindex.

The minutes revealed that the Fed is now acutely aware that, though total employment remains well below pre-pandemic levels, the labour market is fast approaching “short-term” full employment, something which Fed’s Mary Daly just alluded too. As Daly and other Fed members have pointed out, the pandemic continues to hold back worker supply and so the Fed must work with the labour market its got today, rather than working with the labour market it hopes to have in a post-pandemic world of higher labour supply.

That suggests that even if Friday’s US non-farm payrolls number is weak, the Fed will likely shrug this off as a result of weak labour supply rather than demand. In other words, a weak headline number (as was the case last month) shouldn’t dent Fed tightening expectations, which have leapt substantially this week. It thus feels as though the risks for NZD/USD are tilted to the downside as Fed tightening beckons. A break below the 0.6750 region would likely see the pair drop back to test 0.6700 again for the first time since mid-December.