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FX Update - US employment data surprises

Written by Ian Dobbs on January 14th, 2014.      0 comments

Market Overview:
In the first full weeks trading for 2014 the scene has been set for the remainder of the year. The influence on the wider market of the prospect of tapering of the US Federal Reserve’s quantitative easing program (QE) is going to be significant. Friday’s weak US employment numbers have shaken loose the markets commitment towards consistent tapering in the coming months. The subsequent ripple effects have been far reaching. The US dollar has seen some significant pressure and interest rates in the US have moved lower across the board. Direct beneficiaries of the news have been the Australian and New Zealand dollars, which have climbed across the board. Interestingly market linkages that have been in place for the last few years have also started to break down. As interest rates moves lower, the equity markets have been under pressure along with the US dollar. It is certainly too early to say, but this could be a return to more traditional correlations in markets, as opposed to the recent trends that have results from the global stimulus programs in place. Expect periods of increased volatility throughout 2014, as the global economy deals with the withdrawal of the copious amounts of cheap money offered by central banks.

Australia has a couple of data points last week that beat expectation. Both retail sales and the trade balance came in better than expected, although they had little effect on the currency. The AUD did however react positively to the much softer than expected US employment report out on Friday evening. That result saw the Australian dollar back up over 0.9000 cents to the USD in early trade yesterday. So far this week the only data that has been released has been the second tier numbers of job ads and home loans. The job ads figure was a little weaker than expected and the home loans data came in right on forecasts. Both results had very little impact in the market. The key release for the week is going to be Australian employment change, and the unemployment rate, scheduled for Thursday. The market is looking for the economy to have add just over 10,000 jobs and the unemployment rate to remain unchanged at 5.8%. Ahead of that we have more lower tier data in the form of motor vehicle registrations and inflation expectations out on Wednesday and Thursday respectively.

New Zealand
The last few weeks have been very light in economic data from New Zealand. The only results released last week were new car registrations and building consents that both printed on the strong side. This week there is only one release of note and that is the quarterly survey of business opinion which hit the wires earlier this morning. Again we have had a very strong result with the index printing at 52, up from 38 the previous quarter. This has helped to underpin the recent strength seen in the NZD after Friday night soft US employment numbers.
United States
The key piece of data for the United States last week came in the form of non-farm payrolls released on Friday evening. Up until then the week had largely been a positive one for the US with a solid trade balance result and upbeat minutes from the Fed’s last meeting. The market was looking for an employment number of + 200k or better, so when the result of only +74k hit the wires it was a surprise to many. What was even more of a shock is that the unemployment rate actually fell from 7.0% to 6.7%. The market quickly looked through that result as it seems was driven by a declining participation rate. This is because large amounts of people who are now no longer eligible for unemployment benefits are not counted. But that doesn’t mean they have a job. Markets reacted quickly to the much softer than expected result. The USD got sold across the board and interest rates fell. One soft data point is unlikely to change expectations for the Fed to continue tapering quantitative easing (QE) to the tune of $10 bln at each meeting. But a series of soft result might. To that extent we get further key data tonight in the form of retail sales for December, the biggest shopping month of the year. This will be very closely watched. There has been some good news recently with the US government actually showing a surplus for December. This is a big sign that the fiscal headwinds are starting to recede. The deficit for the third quarter of last year was on $173.6 bln which is down 41% on the previous year. Later in the week we have producer prices, inflation, building permits, and consumer sentiment.

Last week provided a mixed bag of data from Europe with the main focus being on the ECB’s rate meeting. President Draghi reaffirmed the central bank’s commitment to take whatever measures are necessary to address a further fall in consumer prices. He also reinforced his forward guidance that rates will stay low for a long time yet. Darghi doesn’t believe the Eurozone is falling into a deflationary trap. Last night he was on the wires quoted as saying there is no broad based Eurozone deflation, and that deflation in some states reflects a necessary adjustment. This may be the case, but you can be sure the ECB are very concerned about the current low inflation rate and any further contraction will get a response with some sort of action. We have also seen comments from ECB’s Mersch who was right on the money when he said “Europe’s recovery still stands on shaky legs”. The rest of this week sees a lot of secondary data being released. These include industrial production, trade balance, the second reading of inflation, and the ECB monthly bulletin.

United Kingdom
The UK economy had a very good 2013 and all expectations are for 2014 to build on last year’s solid gains. But data last week has proved a timely reminder that it won’t all be one-way traffic. Early last week we has a softer than expected result from the services PMI survey, although the overall level is still very healthy. But this weaker than expected result was backed up two other releases on Friday evening. The first was manufacturing production that came in flat against a forecast of +0.4%, and the second was construction activity that fell 4%. That was the sharpest monthly decline since June 2012. These were certainly disappointing results and they impacted on the GBP to a degree, although it will take a fair bit more data like this to materially affect economists’ forecasts for the year ahead. There is key data to come tonight in the form of inflation, and then on Friday we get the latest reading of retail sales.

There has been no data to materially affect the outlook for the Japanese economy in the past week. Friday's release of leading indicators came in very close to expectation and had no discernible impact on the currency. This week will provide something a little more substantial with the current account, core machinery orders, and tertiary industry activity data all set for release.

The Canadian dollar came under intense pressure last week with data universally printing weaker than expected, and BOC governor Poloz voicing disinflation fears. The trade balance and Ivey PMI both missed expectation by a wide margin, and these were followed up by soft building permits and a shocking employment number on Friday. Expectations for an increase in employment of 14.4k couldn’t have been further from the actual result which showed a decrease of 45.9k. The unemployment rate leapt from 6.9% to 7.2%. Data like this certainly backs up Morgan Stanley’s projection that the BOC will move to an easing bias at their meeting on 22nd Jan. With little set for release this week that could alter the current negative sentiment, we can expect the CAD to remain on the back foot in the near term.

Major Announcements last week:
  • US Non-Manufacturing ISM PMI 53.0 vs 54.6 expected
  • European Inflation .8% vs .9% expected
  • Canadian Ivey PMI 46.3 vs 54.5 expected
  • European Retail Sales +1.6% vs .3% expected
  • European Unemployment rate stable at 12.1%
  • Australian Retail Sales +.7 vs +.4% expected
  • BOE leave Monetary Policy unchanged
  • ECB leave Monetary Policy unchanged
  • UK Manufacturing Production 2.8% vs 3.3% expected
  • US Non-farm payrolls 74l vs 196k expected
  • Canadian Employment -45.6k vs 14.6k