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ECB surprises market with a 25bp rate cut - Euro drops 150 points

Posted by Marge Maresca on Nov 7, 2013 8:11:00 AM

CBA FX Strategy - New York Open

Currency markets have been quiet through the European morning ahead of the day’s main events the ECB meeting and press conference and US QIII A GDP print. The BoE meeting was a non-event as policy was left unchanged as fully expected. Major currencies have been range-bound. EUR/USD is holding a little over 1.35, GBP/USD just under 1.61, USD/JPY around 98.70.

USD has continued to consolidate last week’s lift.  Today’s first estimate of US Q3 GDP (8.30am EST/1.30pm GMT) and tomorrow’s October non-farm payrolls numbers will not significantly change that view.  US Cleveland Fed president Pianalto re-emphasized Fed Chairman Bernanke’s view that any tapering in large scale asset purchases is not tightening.  Pianalto also stated that the Fed will keep the Fed funds rate close to zero for “at least the next two years”, and even in late 2016 the Fed funds rate is going to be below 2%.  We see no reason to alter our mildly bullish USD view and envisage some modest upside risks to US GDP (CBA: 2.4%, consensus: 2.0%).

The ECB surprised markets (and ourselves) and cut its refi rate by 25bp to a new record low of 0.25%. The overnight deposit rate was left unchanged at 0.0% so there has not been a move to a negative deposit rate. The move was against the massive consensus – of 70 estimates only 3 economists were calling for a rate cut today. Unsurprisingly the EUR has taken a massive hit, EUR/USD has spiked down close to 1 1/2 big figures to 1.3355. More looks possible when the press conference starts in around 45 minutes. The message from Mr. Draghi will likely be very dove-ish. There must be growing concern about disinflation becoming entrenched and perhaps moving towards outright deflation. Plus there will be plenty of discussion of liquidity conditions, rising EONIA

AUD/USD fell sharply after Australian employment increased by only 1,100 in October, well short of consensus expectations for an increase of 10,000 but close to CBA’s forecast of 5,000.  Full-time employment was particularly weak (-28,000) though the unemployment rate did not increase because the participation rate fell.  AUD is likely stay heavy into this morning’s US Q3 GDP report and is currently trading around 0.9490. NZD/USD drifted lower in line with a lower AUD following the Australian labour force report. However the pair has recovered a little with NZD outperforming AUD.  AUD/NZD declined close to 1.1300 today, in line with our earlier guidance.  At this stage, we think it is too early for AUD/NZD to retest the year’s low of 1.1200.  The Australia-New Zealand two-year swap spread widened slightly to ‑53bpts.  The early October lows in AUD/NZD coincided with an Australia-New Zealand two-year swap spread wider at ‑67bpts.  Firm Chinese data due over the coming days is a near-term catalyst for a move higher in AUD/NZD.

AUD & NZD Today

AUD dropped around ½ cent after the much weaker than expected Oct Jobs data release (Headline +1.1k v +10k exp with f/time -27.9k and p/time +28.9k with the unemployment rate lifting to 5.7% and the participation rate falling to 2006 lows at 64.8% ) but was unable to break strong support that continues on any move towards 0.9470 as Option related buyers continue to try and keep AUD close to the 0.95c level … some Exporter & Asian Central Bank demand was also evident on the session lows ... today we have interest either-side of 0.9460/0.9540 with some stops still stacked to the topside thru 0.9560/70. NZD by comparison traded a narrow 35 point range of 0.8350/85 drifting to near session lows as AUD was hit … today we expect a 0.8340/0.8410 range to hold with noted stops either-side of this range should it break …. Kiwi continues to find some support against the AUD cross as the pairing drifts below 1.1330 for the time being.

Views on the Australian Employment Data

October’s small 1.1k lift in jobs was weaker than market expectations, which centred on a 10.0k increase {CBA(f) +5.0k}.  Full‑time jobs fell by 27.9k, which was offset by a 28.9k increase in part‑time employment.

Today’s figures reflect a labour market that is soft.  Jobs growth has basically stalled.  But despite this, the unemployment rate has been hovering around the 5.6‑5.8% range over the last six months, rather than pushing noticeably higher.  This has been due to a fall in the participation rate (part rate).  The part rate is at its lowest level since 2006.

The headline figures were pretty disappointing today, but digging beneath the surface reveals that the picture is not all bleak.  Monthly hours worked, a leading indicator of employment, increased by 6.2 million hours in October.  This occurred despite a fall in full‑time jobs and an offsetting increase in part‑time jobs.  One interpretation is that those workers in full‑time jobs are working more hours than previously.  This is generally a positive sign for future employment growth.  Rising hours worked per employee should eventually translate into an increase in hiring. 

At the State level, employment outcomes are varied.  Qld is the strongest performing State, with an increase in jobs of 2.3% through the year.  The slowdown in mining construction in WA is not yet having a marked impact on jobs growth in the State and employment is up 1.4% through the year.  Annual jobs growth in Victoria sits just above the national average at 0.9%.  In NSW, jobs growth has slowed and is 0.3% higher through the year.  The softness in the economies of SA and Tas is evidenced in their jobs numbers with both States recording net job losses over the year.

Last week, we published a note exploring the recently falling part rate in Australia (The participation rate is falling – why?” 31 October).  The part rate has fallen by 0.4ppts over the year to October.  We argue that the aggregate decrease in the part rate mainly reflects structural forces, namely the ageing of the population.  And that the fall is being magnified by the cyclical impact of a soft labour market.  We expect this to continue over the near‑term and the combination of these two factors should limit the overall rise in the unemployment rate.  We think the unemployment rate is likely to peak at around 6%.

On Tuesday, the RBA left the cash rate unchanged.  In its accompanying Statement, Governor Glenn Stevens noted that, “the unemployment rate has edged higher. This is likely to persist in the near term, as the economy adjusts to lower levels of mining investment.”  So today’s jobs figures are largely consistent with the RBA’s view on near term labour market outcomes.  Full‑time job losses reflect structural change (e.g. manufacturing).  A lower AUD will be more helpful than further rate cuts, hence the RBA’s focus on the AUD in Tuesday’s Statement.  We retain our previously held view that 2.5% is likely to be the low point of the current easing cycle. 

The focus now turns to the quarterly Statement on Monetary Policy (SMP), published tomorrow.  The SMP will contain updated forecasts for growth and inflation.  

Upcoming Economic Calendar Highlights Important for Exchange Rates

USD – Q3 GDP (today), October non-farm payrolls (Friday).

AUD – RBA Statement on Monetary Policy (Friday), China industrial production, CPI and retail trade (Saturday).

EUR – ECB policy meeting (today), Q3 GDP (14 November).

GBP – BoE policy meeting (today), BoE’s Inflation Report (Wednesday).

CAD – Employment (Friday).

JPY – Current account (Monday), Q3 GDP (14 November).

 

 

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