The USD has made the beginnings of a comeback – but must stand tall after whatever the US employment report dishes up to seal the deal. AUD fundamentals continue to crumble.
This morning, the ECB’s Nowotny was out jawboning on the negative deposit rate issue, saying that it must be studied, that the market over-interpreted what was said and that no major central bank has ever tried it, and that there were no plans to implement negative deposit rates in the immediate future. This had EURUSD backing up quite sharply after a quiet session overnight, but the 1.3100/10 idea resistance area has contained the pair for now. Yesterday’s reversal looked like a key one as I mentioned late yesterday and this 1.3100/25 area looks like a critical resistance zone – with the usual risk that a wildly off-centre US employment number could spike things through that area temporarily – as we have to wait for how the day settles to confirm yesterday’s reversal. The question for everyone today is whether the move yesterday was entirely triggered by the negative deposit rate comment or on the general view that there isn’t much EUR upside with the ECB mulling plans for future easing after having cut rates.
Australia’s ugly data got uglier again overnight as the AiG Services industry survey printed a 44.1 reading for April, the lowest in four months. AUD eased back lower after a bit of consolidation overnight. It is very interesting how the market appears to have lost interest in noticing that the AUD carry is unwinding extremely rapidly as traders seem to be distracted by the gold price or equities or something else. There is a very pronounced divergence in the carry implications of what is going on and the market’s pricing of the Aussie: 2-year swaps have ripped lower from over 3.25% in late March to 2.78% overnight – AUD hasn’t responded as much as it risks doing going forward if the other props for the currency are removed. Keep an eye on that 1.0220/00 area in AUDUSD – it’s very important for a possible large leg down if equity traders can ever get distracted from their full-body skinny dip in the Central Bank punch bowl.
Chart: GBPUSD
Cable finally took a breather yesterday and many were making hay out of the fact that it came right on the 50% retracement of the huge move from 1.6300+ to sub-1.4900 levels. It also came at the top edge of the very well defined rising channel. For bears to get traction from here, a start would be a sharp sell-off back through the 1.5410 area, which was the previous high and just ahead of the 38.2% retracement of the same huge wave. I’ve been stunned that cable was able to move this high, but I’m in “good company” as some major news agency (I could not locate the article) was out in recent days saying that the consensus forecasts on GBPUSD were never more wrong than in recent days, I assume for the month-ahead period.
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Looking ahead
I’ve got little confidence in my ability to anticipate the various scenarios for nonfarm payrolls today. The bottom line is that the US dollar, as I wrote earlier this week, needs to make a stand here. We’ve got signs that it is trying to do so with the EURUSD reversal and GBPUSD finally finding resistance and AUDUSD tumbling toward critical support. But the post-payrolls reaction must either confirm or deny this attempt. We could also see something odd like USDJPY down, EURUSD only down slightly and AUDUSD collapsing if we get a strong risk-off move in the wake of today’s report, but let’s see how the chips fall.
Recall that last month’s payrolls reading was awful, but saw a risk-off reaction and the US dollar rising – the behaviour we were used to before the US dollar started trying to respond positively to positive data earlier this year. The reaction to the March payrolls was quickly erased the following week, but one can see that the reaction patterns have been inconsistent to US data. I would guess that it’s hard to find a strong scenario for risk appetite from today’s payrolls. A so-so, in-line number with a -0.1% drop in the unemployment rate might see markets fretting the FOMC continuing to stay sidelined, while a very ugly number could finally administer a reality check to the Just-Buy-the-Dip mentality in risk assets. One would think that a very strong number would be interesting for the USDJPY testing 100 scenario, but that pair has been coiling in a tightening range and we need to see how the market responds to a breakout through 100 or down through 97.00.
Expectations for the payrolls are supposedly rather low after the weak ADP reading on Wednesday, but we’ve also seen some fairly solid jobless claims numbers (including the best in five years this week) over the last few weeks that may have shifted the anticipation back the other way a bit. I would think that the surprise to the downside comes in below +100 versus supposed consensus of +140k and the really big surprise would be a reading of +200 or better. Recall that last month’s drop in the unemployment rate was purely due to a fall in the participation rate of the labour force as the volatile household survey showed actual negative payroll growth of -206k.
And don’t forget the very important ISM non-manufacturing PMI out at 90 minutes after the US employment report. The market is looking for a small downtick from last month’s 54.4 level.
Stay very careful out there.
Economic Data Highlights
- Australia Apr. AiG Performance of Services Index out at 44.1 vs. 49.6 in Mar.
- China apr. non-manufacturing PMI out at 54.5 vs. 55.6 in Mar.
- Australia Q1 Producer Price Index out at +0.3% QoQ and +1.6% YoY vs. +0.2%/+1.0% , respectively, in Q4
- Norway Apr. PMI out at 48.9 vs. 49.8 expected and vs. 50.0 in Mar.
- Norway Apr. Unemployment Rate out at 2.6% as expected and vs. 2.8% in Mar.
- UK Apr. Services PMI (0830)
- Euro Zone Mar. PPI (0900)
- US Apr. Change in Nonfarm Payrolls (1230)
- US Apr. Unemployment Rate (1230)
- Us Apr. Average Hourly Earnings and Average Work Week (1230)
- US Mar. Factory Orders (1400)
- US Apr. ISM Non-manufacturing Survey (140)
- US Fed’s Tarullo to Speak (1630)
- US Fed’s Lacker to Speak (!645)
- Canada Bank of Canada’s Carney to Speak (1705)
- Australia Mar. Retail Sales (Mon 0130)
- China Apr. HSBC Services PMI (Mon 0145)