- Non-farm payrolls were lower than expected on Friday printing a rise of just 162,000 versus the 184,000 expected and hourly earnings (+1.9% YoY v 2.2% expected) weren’t nearly as strong as many had hoped but unemployment fell to 7.4% for a 4 year low.
- It was a confusing jobs report with a little bit of something for every market which is what we saw. Stocks rallied tentatively, bonds also rallied a little but as has become usual it was FX markets were much of the volatility was felt. At the close Euro (1.3278), GBP (1.5286) and Yen (USDJPY 98.91) were all stronger against the US dollar but the Aussie was unable to hold gains closing off the lows but down at 0.8897.
- The stock market too was volatile with the S&P taking a solid hit after NFP but recovering with the S&P 500 (+3 pts, 0.18% @1,710), Dow (+30 pts, 0.19% @15,658) and the Nasdaq (+14, 0.39%) all closing on the highs of the day as the Septaper becomes Dectaper or even NextTaper for 2014.
- European markets missed much of the US rally closing flat to down mostly. The FTSE fell 0.51%, the DAX a marginal 0.04%, the CAC rose a tiny 0.08% while in Milan and Madrid stocks where down 0.24% and up 0.40% respectively.
- Bonds rallied hard in the US and Germany off their highs with US 10’s falling from 2.75% to 2.60% at the close while in Germany the 10 year Bund rate dropped from 1.74% to 1.65%. In the UK 10 year gilts were higher on the day up 2 pts at 2.425% but down from the high at 2.49%.
- On Commodities gold had a wild and crazy day falling to $1283 before bouncing back to close at $1307 oz. (much damage was done to the bull case), Nymex crude fell 0.88% but Dr Copper rose a smidge to $3.16 lb. Our friends the Grain complex had another big day with corn down 2.36%, wheat up 0.38% and soybeans down 1.97%.
On the Data front it’s a bank holiday in Australia so FX and Bond markets will be very quiet but that doesn’t stop the releases from flowing with the TD monthly inflation guage as well as retail sales in Australia. In China we have the HSBC Services PMI to follow on from the official non-manufacturing PMI over the weekend. In Japan we get the BoJ’s economic survey and then in Europe and the US we get the Markit and ISM non-manufacturing surveys.
Non-farm’s drive FX volatility.
I wasn’t trading on Friday night as I’d had a big week and had to get up at 4.30am Saturday to write my Weekly Newsletter but you can see in the chart below of the Major FX pairs and the S&P 500 of the immediate impact that the undershoot that the print of 162,000 caused in markets.
2 things are evident in the price action of these markets:
- The USD took a swift kick in the tail against the all the FX pairs losing ground against AUD, EUR, GBP, JPY and Gold (I’m placing this in the FX basket as a currency proxy). The S&P took a hit too; and
- Unlike the rest of the pairs the Australian Dollar gave back its gains in a heart beat and after a volatile period was weaker into the close.
Now what you don’t see here is that the Kiwi and the Loonie also reacted like the Aussie so what we like to refer to as the “Commodity Bloc” completely underperformed the market if I can term it that.
The key message here is that there is a growing feeling in markets that the commodity super-cycle has ended, or is at least in hiatus, and as such traders are moving back into the bigger safer pairs.
And why not? Check out this chart of the Citibank Economic surprise index of the BRIC economies – it is a shocker!
Easy to see why the commodity bloc is and will under preform and when you add in a bit of distinct Australian economic woes themselves easy to see why AUDNZD is soooooooooo weak.
RBA to cut this week but the Aussie might rally
It is universally expected that the RBA will cut rates on Tuesday afternoon at 2.30 pm Eastern Standard time. If they don’t I’d be surprised both because the Australian economy needs it and because the Governor of the RBA Glenn Stevens pretty much placed a cut front and centre at the Annika Foundation talk last week.
If you believe that Australia and Australian growth via the mining boom and demand for rocks and dirt is tied to the outlook for the BRIC’s then the above chart is one that reinforces its up to the domestic sector to step up to the plate and start spending. But if like us here at GlobalFX you believe also that households are unable to do that because they are either busy trying to pay down their still very elevated debt burden or servicing their still high interest costs then it is hard to step into the breach.
Equally those Australians who are self funded will be in a bit of a pickle because their earnings are continuingly being eroded by RBA rate cuts.
So there is a balance to be struck here somewhere but the RBA is likely to cut again tomorrow and what they say at that time will be vitally important for sentiment in the economy and for the Aussie Dollar going forward.
Can the Aussie find support?
In this morning’s CFTC Commitment of Traders Report, which you can find here, you’ll see that the Big Speculators (as reported on Bloomberg) are the most short they have been in Aussie Dollars for all-time. It is a decent position representative of the wider speculative community who have been selling Aussie with gusto now for a while.
Now our view is that the Aussie will go lower, into the 80/83 zone, in the year ahead but we wonder if maybe some sort of support might be found sometime soon? Already the Aussie achieved our target of 0.8916 making a low on Friday night of 0.8870 on Friday. There is however a tentative sign that the Aussie is going to find support in the 88 cent zone for a bounce.
It is too early to say yes yet based on my system so this qualifies as a feeling rather than an opinion and I will update over the next few days.
Good luck and have a great day