Euro and Aussie still hanging in as markets await non-farm payrolls

January 10, 2014

Interesting price action in FX markets and to be frank I can’t believe the Euro has recovered the way it has on a fundamental basis. The Eurozone is struggling and just because Mario Draghi says that European inflation is not going the way of japan in the 1990’s, implying that there is no need to use unconventional monetary policy like QE, doesn’t mean that this isn’t exactly the track that European inflation is actually on.

Anyway the ECB and BoE meetings got currency traders hoping with the Euro trading in an almost 1 cent range just after the ECB announcement and press conference. The key is that ECB President Draghi noted that further rate reductions could be on the cards. But from 0.25% that is really no big deal which is why Euro has climbed back somewhat to sit at 1.3603 this morning. What would really get things going as noted above is the eventual hint of some unconventional QE style measures.

Elsewhere Mark Carney and the BoE also left rates on hold but the pressure on him is all the greater because the UK economy seems to be healing so his adherence to forward guidance is likely to be tested as unemployment improves in the months ahead. GBP is up 60 pips at 1.6468 this morning.  USDJPY sits at 104.77 and the Aussie recovered somewhat from yesterday’s weakness and is back near 89 cents at 0.8898.

There has been a lot of debate about the outlook for the Aussie dollar over the past day or so with and article on Bloomberg yesterday which was reprised in the SMH and then followed up in the AFR this morning (copied a cynic might suggest given some of the same sources).

It prompted me to share a chart that I have been watching since the late 1990’s and which helped me at that time target a move under 50 cents when it was not on anyone’s radar at the time.

The key point I would make is that the last 12 months has felt, in market terms, very much like the run up to 200 when the Nasdaq was going gangbusters and the old economies – or at least that was the perception – like Australia and Australian assets were so mush out of favour. At the time investors eyes turned towards other asset classes as more likely to reward than owning the Aussie dollar or mining shares.

You can see a clear corollary to what has occurred in the past 12 months as US and global stock markets have made either all time or multi year highs. you can say it’s about China but realistically its about return on investment and for the moment the Aussie dollar is not where the focus is.

The weekly chart above shows the big old down trend that the Aussie has been in for some time now and also the proximity it has to the bottom of the trend which comes in at 0.8720 at the moment which becomes the target if 0.8940/50 gives way.

looking to the data flow overnight and we see that jobless claims fell 15,000 last week to 330,000 which is still somewhat elevated from where they were printing a month ago. But given one of the two most important data releases each month in non-farm payrolls is due out tonight the impact has been negligible and markets in the US have recovered off early weakness and are back closer to home for the day.

At  the close the Dow is down 0.11% at 16,445, the Nasdaq has fallen 0.23% and the S&P 500 is up 1 point for a 0.03% gain. Across the pond in Europe stocks were lower with the FTSE falling 0.46% as retailers got hit. The DAX fell 0.8%, the CAC down 0.84% while in Milan stocks rose 0.34% and in Madrid stocks were down 0.19%.

Closer to home the terribly underperforming ASX over the past week was down again on ASX overnight trade with the March SPI 200 contract has had a negative tone and is down 7 points to 5286 bid.

On commodity markets we had a false break in Nymex crude which traded down to its lowest level since may last year overnight but has recovered off the lows to be only down 0.13% at $92.21. Gold has had its first positive day in three up 0.33% at $1226 oz while copper lost another 4 cents to $3.35 lb. On the Ags corn and wheat were hit again falling 1.38% and 0.76% respectively while soybeans were dragged along for the ride losing 0.36%.

On the data front non-farm payrolls tonight is the key to everything in many ways – stock market moves, US dollar certainly and of course bonds which have been flirting once again with 3% in the US this week. The market is expecting 195,000 new jobs to have been created in December.

But before we get to that at 12.30pm AEDT tonight we have a fairly full day of data with HIA new home sales in Australia, Trade data and new loans out of China, japanese leading indicators and then tonight we see UK industrial production, Euro wide GDP and the Canadian unemployment rate.

Have a great day and good hunting and watch out for non-farm payrolls, that’s tin hat country.

Greg

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