The stakes are high for tomorrow’s Non-Farm Payrolls report causing some trades to reduce long dollar positions ahead of the high profile release. Federal Reserve officials made it very clear that the decision on a rate rise in September would hinge in large part on tomorrow’s jobs report.  If non-farm payrolls exceed 200K and the unemployment rate holds steady or better yet improves, then expectations for a rate hike this month will spike, sparking a broad based dollar rally that will take USD/JPY to fresh 1 month highs.  If the numbers are strong enough, we could even see 105 USD/JPY.  However, NFP disappoints we could see a nasty correction in the dollar particularly after the strong gains that it has seen this month. The steepest decline should be against the British pound and New Zealand dollars – two currencies that have performed particularly well pre-NFP.

 

Taking a look at the leading indicators for non-farm payrolls, there’s no reason to believe that the number will be overwhelming strong.  We know that Federal Reserve officials are hopeful because they have been talking about the healthy pace of job growth but the smaller amount of layoffs, rise in jobless claims and mixed confidence readings raises red flags. The increase in ADP employment change was extremely modest and t the manufacturing sector continued to shed jobs.  Our most reliable leading indicator for non-farm payrolls is the ISM non-manufacturing report and that will not be released until next week.  Even though U.S. policymakers have been adamant about the need for a further rate rise, investors have been very skeptical.  They certainly don’t believe that the economy is healthy enough for rates to rise twice this year nor are they convinced that data is strong enough to warrant a hike in 4 weeks.  An unambiguously positive report would be needed to convince them otherwise.

Investors are buying New Zealand dollars ahead of the Reserve Bank’s monetary policy decision. This demand suggests that traders don’t expect the RBNZ to signal any immediate plans to lower interest rates. Having just surprised the market with a rate cut last month, no additional easing is expected but when the Reserve Bank eased, they also warned that further stimulus may be required.  So the big question is whether this view will be emphasized in April.

The RBNZ’s primary concern last month was low inflation – the central bank lowered their 2016 Q1 annual inflation outlook from 1.2% to 0.4% and their Q4 2016 annual inflation rate to 1.1% from 1.6%. They worried that prices would remain low for some time and that domestic risks would contribute to falling inflation expectations.

Thankfully consumer prices rebounded in the first quarter with the year over year rate ticking up to 0.4% from 0.1%. From an inflation perspective, the RBNZ has less to worry about but consumer spending, service and manufacturing activity weakened in the month of March, leaving the central bank with many areas of concern.

So while the RBNZ may not go as far as lowering rates in April, they could maintain their dovish bias, which would renew the decline in the New Zealand dollar.

Here’s a look at how New Zealand’s economy performed between the March and April meetings