Saxo Bank | May 07, 2014 06:45AM ET
The kiwi fell sharply late yesterday after the Reserve Bank of New Zealand's Graeme Wheeler was out threatening intervention if the kiwi remains strong even as milk prices continue to drop. Cementing the drop in the kiwi was a weak Q1 jobs report (and I suspect weak risk appetite was hardly helping either). The NZ unemployment rate failed to drop in Q1 as was expected, though this was due to a large increase in the participation rate, and the overall number of jobs rose. Less confusing and probably likely to weigh more heavily in the RBNZ’s policy calculus was the much weaker than expected rise in wages – at only a plus 0.7 percent quarter-on-quarter clip rather than the plus 1.0 percent expected. The “private wages including overtime” measure for the quarter showed an even slower pace of wage gains, at a mere plus 0.3 percent. The kiwi will have a hard time progressing any higher from here with the RBNZ likely to lean against any further upside pressure. And if rates at the front end of the yield curve continue lower like they did in the wake of last night’s employment report, the market will be happy to weaken the kiwi without the central bank’s intervention. Japan’s Markit Services PMI suffered a large drop in April, most likely due to the VAT hike at the beginning of the month. The Manufacturing PMI for April (released a week ago) was also weak and is a bit harder to attribute to the VAT hike. The weak data out of Japan and the rising yen are certainly providing fresh impetus for the Bank of Japan to act sooner rather than later, though the real pressure will come if domestic holders of Japanese government bonds s (especially the GPIF) begin to accelerate their sales of JGB holdings. Chart: EURJPY The market is cracking open quite the can of worms as JPY crosses are looking heavy and we’ve hardly even begun a large scale risk sell-off. EURJPY is finally starting to move a bit this morning, joining USDJPY (note the key 101.00/100.75 zone in that pair). There is some minor local support here at 141.00, but the big focus will come in the wake of the European Central Bank meeting, with any combination of global risk aversion and a more dovish than expected ECB possibly uncorking a large-scale downside move.
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