Thoughts from our Strategy Team
The European morning was very quiet following yesterday’s USD plunge and ahead of the upcoming all-important non-farm payrolls print. German industrial production bounced 1.8% MoM in April following a 1.2% MoM jump in March. EUR/USD rallied up a little but essentially remains steady around the 1.3250 level following yesterday’s sharp spike higher. GBP/USD has dipped slightly below 1.56, USD/JPY has extended its fall below 96. Today’s non-farm payrolls number is a hugely important event for markets.
A specific trigger for yesterday’s USD drop remains difficult to identify. The USD move is in the opposite direction of the unexplained very large strengthening in the USD that occurred on 10 May. The May US non-farm payrolls (8.30am EST/1.30pm BST) is centre stage. How long the USD “unwind” lasts will depend on the health of the US labour market, which is key to the Fed’s decision about when to begin tapering its asset purchases. Following the soft ADP report on Wednesday, market participants have likely pared back expectations for payrolls (163,000 is the latest published consensus). A soft payrolls (below 130,000) will likely re-weaken the USD while a strong payrolls (above 200,000) will likely strengthen the USD and reignite the debate about a near term tapering of asset purchases by the Fed.
The key development in Asian trade has been a further slump in USD/JPY, extending yesterday’s move lower. USD/JPY has dipped to the lowest level since mid-April (95.285), and Japan’s Finance Minister Taro Aso commented that he wouldn’t intervene to halt the JPY move, encouraging further strengthening in the yen.
While EUR/USD and GBP/USD were very steady against the USD throughout Asian trade, in contrast AUD/USD and NZD/USD have been volatile, and have given up yesterday’s gains against the USD. AUD/USD is back trading around 0.9500 and NZD/USD at 0.7950 at the time of writing. The Antipodian currencies are hostage to USD moves over the remainder of the day, with the regular Chinese monthly data batch released over the weekend, after markets close.
USD/CAD has clawed back some of yesterday’s 1.5% decline in Asian trade today. In terms of USD/CAD impact, yesterday’s USD volatility overshadowed new BoC Governor Poloz’s first address. Nonetheless, Poloz appears to retain consistent views with previous Governor Carney in maintaining a weak tightening bias. Today we could see further USD/CAD volatility with the May Canadian labour market report due (8:30am EST). The Canadian labour market data has been volatile over the past six months, with monthly employment change ranging between +56,000 and -54,000. We expect the underlying trend is gradual jobs growth of around 15,000 per month, and a print around this level and a steady unemployment rate around 7.2% to continue. Typically we would expect USD/CAD to ease on the combination of strong US and Canadian payrolls reports. But in the current environment, we expect the USD movement from US payrolls to eclipse any reaction to the Canadian data. However, a good Canadian report should help CAD outperform on the other cross rates.
AUD and NZD order-book going into May’s Nonfarm Payrolls …. Don’t forget the Chinese May data dump over the weekend for CPI, Industrial Production and Retail Sales.
AUD – Exporter buyers 0.9450 and then Exporter/Technical buying 0.9380/0.9420 with stops below in size …. Sellers; 0.9640 …. 0.9680/0.9720 …. 0.9760/0.9800 …. Overnight Aust equities again hit to close out a near 4% fall for the week, July RBA Cut to the OCR sits above a 50% chance and May’s Construction Index data came in at 35.3 marking 3 full years of contraction.
NZD – solid Exporter buying into 0.7900/30 with stops below here that would see NZD target 0.7810/40 …. Sellers; 0.8020/60 and then ahead of 0.81c.