FX Update: RBNZ Crushes Kiwi − JPY Crosses Looking Heavy

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. Germany saw an ugly drop in its March Factory Orders data, though the data series is choppy and tends to mean revert. Still, the growth in factory orders has generally underwhelmed in recent months. Looking ahead Today is a day of waiting ahead of tomorrow’s ECB meeting, though there seems a bit more potential for movement today than we’ve grown accustomed to lately due to yesterday’s sharp extension of the USD sell-off. It’s very tempting to take yesterday’s move at face value and look for more USD weakness, but we’ve seen the market failing so many times lately to build directional momentum, so conviction remains low, with the default expectation of a minor extension of USD weakness. In the case of USDJPY, the potential for an extension of the downside move may be somewhat greater in the event this bout of risk aversion extends into a larger scale correction in asset markets. It will be a bit easier for ECB president Mario Draghi to surprise the market at tomorrow’s meeting on the dovish side after this week’s batch of PMIs, the key April German confidence surveys coming in better than expected, and the most recent Eurozone inflation readings failing to show a further decline in inflation. I suspect half measures are somewhat-to-quite likely (I don’t care about or think the market would be impressed by any further shaving of the interest rate, but a move to stop sterilisation of SMP purchases would be a strong possibility) together with a further raising of the rhetoric on the exchange rate and a fuller discussion of how the ECB could move to bring relief to banks. Remember that we have the May EU parliamentary elections coming up in less than three weeks. I suspect the EUR either finds a top this week if the ECB impresses sufficiently, or by the end of this month. Stay tuned. Watch out for Janet Yellen's testimiony before Congress today and tomorrow. The market is expecting absolutely nothing in the way of hawkishness, so it would be easy for here to surprise on the hawkish side after a string of very dovish statements. We also have the Australian employment report up after last night’s weak Retail Sales report. This release will be critical for whether AUDUSD can realise a fifth wave potential or if yesterday’s melt-up was merely a brief short squeeze. Economic data highlights

• New Zealand Q1 Unemployment Rate out at 6.0% vs. 5.8% expected and 6.0% in Q4
• New Zealand Q1 Employment Change out at +0.9% QoQ and +3.7% YoY vs. +0.6%/+3.4% expected, respectively and vs. +3.0% YoY in Q4
• New Zealand Q1 Average Hourly Earnings out at +0.7% QoQ vs. +1.0% expected and +0.3% in Q4
• UK Apr. BRC Shop Price Index out at -1.4% YoY vs. -0.8% expected and -1.7% in Mar.
• Japan Apr. Markit Japan Services PMI out at 46.4 and 52.2 in Mar.
• Australia Apr. AiG Performance of Construction Index out at 45.9 vs. 46.2 in Mar.
• Australia Mar. Retail Sales out at +0.1% MoM vs. +0.4% expected
• China Apr. HSBC Services PMI out at 51.4 vs. 51.9 in Mar.
• Switzerland Apr. Unemployment Rate out unchanged at 3.2% as expected
• Germany Mar. Factory Orders out at -2.8% MoM and +1.5% YoY vs. +0.3%/+4.3% expected, respectively and vs. +6.5% YoY in Feb.

• Switzerland Apr. Foreign Currency Reserves (0700)
• Canada Mar. Building Permits (1230)
• US Q1 Nonfarm Productivity and Unit Labor Costs (1230)
• US Fed’s Yellen to Testify before Congress (1400)
• UK Bank of England’s Haldane to Speak (1730)
• US Mar. Consumer Credit (1900)
• UK Apr. RICS House Price Balance (2301)
• New Zealand Apr. QV House Prices (0000)
• Australia Apr. Employment Change and Unemployment Rate (0130