Market Update 5/08/2024

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Due to worries about a significant economic downturn in the US, the USD, bond yields, and equities all declined. The S&P 500 dropped by 1.8%, the Dow by 1.5%, and the Nasdaq by 2.4%. The yield on the US 10-year bond dropped by 19 bps to 3.79%.
 
The risk-off sentiment continues as US payrolls raise concerns about the economy’s ability to achieve a soft landing. Non-farm payrolls grew by just 114k in July, well below the expected 175k, which is a significant shortfall. The unemployment rate increased to 4.3% from 4.1% in July, fuelling fears of a recession. This rise in unemployment is now 0.5% higher than the 3-month average low from the past year.
 
The data led Wall Street banks to urge the Fed for more aggressive rate cuts. Citi and JP Morgan predict a 50 bps cut at the September FOMC meeting, and market pricing now suggests a nearly equal chance of either a 25 or 50 bps cut. The USD dropped sharply as concerns about a hard landing for the economy grew. The dollar index (DXY) fell more than 1% to its lowest level since March, traded below 103.20.
 
NZDUSD rebounded in the second half of last week, boosted by a weaker USD. We started the day around 0.5950, with a focus on Middle East tensions. With an AUD holiday, the market may be slow initially. Weaker equities, the risk of a higher NZ unemployment rate, and a ‘risk-off’ sentiment might limit the NZD’s rise for now. The previous highs at 0.5985 are now resistance levels, with support first at 0.5930 and then at 0.5900.
 
NZDAUD remained steady near 0.9150, consolidating nearly a 2% increase from last week. This week’s RBA decision and the NZ unemployment data will influence this exchange rate. Currently, it’s facing resistance around the 100-day moving average at 0.9150. Initially, expect the range of 0.9150-0.9165 to limit any further gains.
 
NZDJPY dropped to about 87.30 by the end of the session, which is nearly 12% lower than its peak in July. Similarly, the USD/JPY exchange rate fell last week, particularly weakening on Friday due to poor US economic data, and ended the week at 146.50, which is 9.5% below its mid-July highs. The overall market sentiment has been risk-off, meaning investors are moving away from riskier assets. This has negatively impacted the NZD and AUD, especially against the JPY, and has also affected other currency pairs throughout July. This situation presented good opportunities for exporters to consider long-term hedging to protect against future currency fluctuations.
 
There is no significant domestic data today. We have the Caixin services PMI from China and the services ISM from the US. Last month, the services ISM unexpectedly fell into contraction, but the consensus anticipates a rebound in July.
 
This week, we’ll see the RBA’s decision, with expectations of keeping rates unchanged at 4.35%. The first-rate cut is projected for February, though it could happen sooner if conditions change. Locally, we’ll get the NZ unemployment rate on Wednesday and inflation expectations on Thursday. Both reports will influence the market and shape expectations for the RBNZ’s decision next week.

Here are the latest mid-market rates:

NZD/USD 24 HOURS 

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