AUD/USD and NZD/USD Fundamental Daily Forecast – Positive, but Limited Reaction to US NFP Headline Miss

The Australian and New Zealand Dollars closed higher on Friday, but still ended lower for the week on the heels of the December U.S. jobs report that missed expectations, but it was still strong enough to keep the Federal Reserve’s tightening path intact.

On Friday, the AUD/USD settled at .7182 up 0.0019 or +0.26% and the NZD/USD closed at .6776, up 0.0028 or +0.42%. The Invesco CurrencyShares Australian Dollar Trust ETF (FXA) finished at $71.04, down $0.02 or -0.03%.

Aussie and Kiwi traders primarily reacted to the headline miss in the jobs report, which was basically an excuse to book profits following a nearly weeklong sell-off.

US Non-Farm Payrolls Report Recap

The U.S. Labor Department said Non-Farm Payrolls rose by 199,000 last month,  well short of the 400,000 estimate. But analysts noted underlying data in the report appeared sturdier, with the unemployment rate falling to 3.9% against expectations of 4.1% while earnings rose by 0.6%, indicating tightness in the labor market.

Job gains last month were led by the leisure and hospitality sector, which added 53,000 positions. Professional and business services payrolls rose by 43,000 jobs. Manufacturing added 26,000 jobs, while construction employment rose 22,000.

There were also gains in transportation and warehousing as well as wholesale trade and mining. Government employment fell by 12,000 jobs. Retail payrolls dropped as did those for utilities.

Essentially, all of the key areas of the economy showed growth, which is good news. Furthermore, although the report missed on the top side, the components of the report performed very well.

Early Fed Rate Hike Expectations Rise

The U.S. jobs report also increased expectations the Fed will begin to hike interest rates at its March meeting, with futures on the federal funds rate implying a 90% chance of a hike, up from Wednesday’s rise.

Futures on the federal funds rate on Wednesday have priced in a roughly 80% chance of a quarter-percentage-point rate hike by the Federal Reserve at the March meeting following the release of the U.S. central bank’s minutes of its last policy meeting.

For the year, rate futures are implying about three rate increases in 2022.

Fed officials said last month the U.S. labor market was “very tight” and might need the Fed to raise interest rates sooner than expected but also reduce its overall asset holdings to tame high inflation, according to minutes of the central bank’s December 14-15 policy meeting.

Surge in New Coronavirus Cases Weighing on Aussie, Kiwi Sentiment

After months of very low numbers, Australia has also seen an explosion in new coronavirus cases in the past few weeks which is hitting consumer sentiment and spending, particularly in the services sector.

Analysts are starting to trim forecasts for household consumption this quarter, while the Reserve Bank of Australia’s (RBA) optimism about a rapid recovery is being sorely tested.