FX Update: Kiwi Dives On Weak Jobs Print

 | May 06, 2015 04:59AM ET

The New Zealand Q1 employment report came out weaker than expected overnight, with no change in the revised-higher unemployment rate (at 5.8% ) rather than the expected drop. Also, the employment change rise was slightly smaller than expected, though there were still solid job gains on the month and the participation rate strength partially explains the weaker than expected unemployment rate.

Earnings growth also fell short of expectations, so all in all, the market was happy to continue the NZD selling theme and AUDNZD jumped through the 1.0500 level and NZDUSD traded lower, even in a very weak USD environment.

We’re still two days from the week’s critical event, the US employment report on Friday, but today we may get a test of whether the USD doubters can continue to sell the greenback if we get a strong ADP number. It was remarkable that the market entirely ignored yesterday’s strong ISM non-manufacturing survey.

The key driver here may be positioning rather than US data/Fed outlook as the “macro trade of the year” – long European equities on ECB QE and hedging the currency exposure – has been going terribly wrong lately. Both legs of this trade headed in the wrong direction over the last week, and significant positions may be getting taken out ahead of an obviously important US jobs report as the market frets and even worse train-wreck if we see a weak report.

The question from here is whether this trend/squeeze is largely played out, or whether we risk another extension post-Friday. In other words, everything boils down to how much positions have been adjusted at this point and to the report itself. Stay tuned.

Chart: NZDUSD

The downside NZDUSD argument looks more compelling after the weak NZD data overnight, but a look at the USD levels elsewhere is cause for pause and it will be tough for this pair to continue to drive significantly lower unless we see the USD putting up a fight and rallying after Friday’s jobs report.