FX Update: JPY rally a choppy affair. RBNZ surprises with big hike.

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FX Trading focus: JPY resets higher on US treasury yield drop after weak US job openings data. RBNZ surprises with big hike, sends AUDNZD to new cycle lows.

The February JOLTS job opening survey in the US surprised with a reading of 9.9 million jobs, over half a million below expectations and with a -260k revision to the prior number. It shouldn’t have garnered the scale of reaction it got, but that just shows how sensitive the market is here to anything confirming fears of an economic slowdown. As I discussed in this morning’s Saxo Market Call podcast, the JOLTS survey quite noticeably lagged the nonfarm payrolls change cycle in the prior two “normal” recessions in 2001 and 2007-08. Luckily, we have plenty more US data to entertain us over the coming week, including today’s March ADP payrolls change and March ISM Services, tomorrow’s latest weekly initial jobless claims number, Friday’s March jobs report and the March CPI print next Wednesday.

With the plunge in yields and risk sentiment finally wobbly rather than celebrating the drop, the JPY has ideal conditions to make a statement, which it about 50% did – pulling sharply higher versus the US dollar, but merely bouncing back from weakness elsewhere. To get more upside in JPY we’ll need to see the US 10-year sticking new cycle lows below 3.25% and for the global growth outlook and risk sentiment to deteriorate, with a helpful push back lower in crude oil prices possibly also on the wish list. For now, the USDJPY is still “underperforming” to the downside relative to its traditional coincident indicator, the US 10-year treasury yield, which closed at its lowest level for the cycle near 3.35%, if several basis points above intraday lows during the recent banking turmoil in March.

Broad weakness in the US dollar yesterday was partially reversed on weakening risk sentiment, and key individual USD pairs reversed entirely in the European session today. AUDUSD has been pounded back below 0.6700 (in part on AUDNZD flows – more below) even after RBA Governor Lowe was out overnight trying to position this week’s hold on further interest rate increases as not necessarily a lead-in to eventually cutting rates: “The decision to hold rates steady this month does not imply that interest rate increases are over,” and  “Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe.” The

Chart: AUDNZD
The opposite impressions drawn from the RBA and RBNZ meeting this week have triggered a sharp slide in AUDNZD, as the RBNZ waxed hawkish and surprised with a 50-basis point hike overnight, with no indication that it is guiding for a pause. The larger hike from the RBNZ immediately transmits into the yield spread, which for the 2-year swaps has now dipped to within 10 basis points of the lowest weekly close since the 1990’s at -162 basis points. RBA expectations for the coming few meetings are flat, while about a single further 25 basis point hike is priced in for the RBNZ despite the overnight 50 basis point move (25 basis points only was expected – also by me, and I was even leaning for a guidance shift). In the coming one or possibly two quarters, I suspect one of the central banks will be seen as having committed a policy mistake, whether it is Australia in having moved too cautiously as it seemed to want to avoid too much transmission of policy into slowing the economy and household budgets, or the RBNZ having taken things too quickly and causing a more disruptive unwind in the housing market and perhaps the wider economy (or is it a recession by design?). The March CoreLogic NZ home price data showed home prices declining at a record -10.5% YoY clip, just “eclipsing” the -9.7% low of the 2008-09 cycle. But note that we are coming off peak home price rises of higher than 25% YoY in late 2021 and into early 2022. AUDNZD is working down into its minimum valuation region assuming the policy divergence can't stretch much wider from here.