Commodity Currencies Tumble On Worsening Outlook; Elections

Aussie, Kiwi, and to a lesser extend Loonie, were under much pressure last week on worsening global and domestic economic outlook. Selling further accelerated on Friday after the release of disappointing US job data, which triggered massive risk aversion and steep fall in equity markets. In addition, investors were seen nervous ahead of key event risks of France and Greece elections over the weekend. Japanese yen was the strongest currency as markets continued to express dissatisfaction over BoJ's quantitative easing program. Dollar was the second strongest currency last week but we must emphasize that the greenback was bounded in range against Euro, Swiss Franc and Sterling. There is no clear direction in dollar yet even though some might point to risk aversion as a dollar supportive factor. We'd require to see a decisive breakout in EUR/USD from recent range to confirm the underlying momentum in greenback, and that could possibly happen as reaction to the elections. Otherwise, we're just in markets of bullish yen, bearish commodity currencies, and mixed dollar.
 
US non-farm payroll showed a mere 115k growth in the job market in April, way below expectation of 165k. However, March's figure was revised up from 120k to 154k. The combined two month figure was there at 269k, which is not too far from expectation of 285k even though it's still lower. Meanwhile, unemployment rate unexpectedly improved to 8.1% versus expectation of being unchanged at 8.2%. Some analysts also pointed out that the weakness in US markets in March and April was indeed an impact of distortion in hiring pattern due to warm winter in US. That is, hiring was pulled forward to the first two months of the year, with combined 534k expansion. The average monthly job gain from January to April was at 200k, which was a decent number. Also, initial jobless claims showed improvement to 365k in the week ended April 28, after staying above 380k level in the prior three weeks. So, it's still a bit earlier to declare that growth momentum in US job markets is deteriorating much. The ISM indices were mixed, with manufacturing showed unexpected improvement to 54.8 in April which services dropped to 53.5. Overall, the road ahead for US economy would remain difficult in Q2, but there isn't strong evidence for Fed to restart its quantitative easing.
 
The ECB held the main refinancing rate unchanged at 1% in May despite slowdown in macroeconomic outlook. President Draghi stated that economic data received in the first 3 months of the year indicated "tentative stabilization" of economic activity at "low levels". Draghi also said in the post meeting conference that interest rate cut wasn't discussed during the meeting. However, despite downside risks, a gradual recovery should follow later in the year. Unlike market expectations, the central bank did not hint any further stimulus in coming months during the meeting. More in ECB Leaves Interest Rates Unchanged, Delivers Less Dovish Statement.
 
While ECB was slightly less dovish, market event didn't support this. Spain's GDP contracted -0.3% qoq in Q1, slightly better than expectation of -0.4% qoq. Nonetheless, the data still marked that Spain is back into recession after similar contraction in last Q4. S&P rating services downgraded credit rating of 16 Spanish banks, noting that the negative outlooks mirrored that on the long term rating of Spain's sovereign debt. Overall Eurozone PMI manufacturing was revised down from 46.0 to 45.9 in April , versus March's 47.7, and was lowest since June 2009. Data from peripheries were weak. Spain PMI manufacturing missed expectation and dropped to 43.5, worst number since June 2009. Italy PMI manufacturing was a shocker and came in at 43.8 versus expectation of 47.0. Meanwhile, situations in the core are not much better. Germany PMI manufacturing was revised lower from 46.3 to 46.2 while French PMI manufacturing was revised down from 47.3 to 46.9. Holland PMI manufacturing dropped from 49.6 to 49.0. Ireland PMI manufacturing dropped from 51.5 to 50.1. Eurozone services PMI was also revised down from 47.9 to 46.9.
 
France and Greece will hold elections this weekend on May 6. In France, Socialist challenger Hollande continues to lead presidential incumber Sarkozy in polls and is favored to win the election. There are two major questions should Hollande wins. Firstly, he's been clear that he will push to re-negotiate the fiscal compact in EU. Secondly, the Franco-German leadership in Eurozone could be changed and Merkel could be isolated in her campaign for austerity. And Hollande's victory would indeed be taken as a sign of indirect disapprove of Merkel. Meanwhile, there are much uncertainties in Greece election. It's not even doubtful whether the dominant New Democracy and Pasok could win majority of 300 seats in Parliament between them. And Greece could have another elections by year end. Meanwhile, a stable government is needed by June to push through the austerity measures as requirement of the bailout package. And, another deadlock there could push Greece to leave Eurozone and default on its debt.
 
Aussie tumbled sharply last week after RBA lowered the cash rate by -50bps to 3.75% in April as economic developments since the last meeting has weakened and inflation has moderated. That was deeper than markets' expectation of 25bps cut. The central bank acknowledged growth later in the year would be 'below-trend' but a deep downturn is not likely. Policymakers also acknowledged that the job market 'softened'. Concerning inflation, recent indicators have shown a decline in price level. More in RBA Cut Cash Rate To 3.75%. Later in the week, Aussie was further soldoff after , RBA released updated forecasts in its monetary policy statement. Growth is projected to be at 3.0% in 2012, down from February's projection of 3.5%. CPI is projected to be 2.5% by the end of the year, down from prior projection of 3.0%. Core inflation is projected to be at 2.25% by the end of the year, down from prior projection of 2.75%. And, the updated projections are based on assumption that the overnight cash rate remains unchanged at 3.75%. Markets are now pricing in more than 70% chance of another 25bps cut by June.
 
New Zealand Dollar dropped sharply as data showed unemployment rate unexpectedly jumped to 6.7% in Q1 versus expectation of a fall to 6.2%. That's the highest number since 2010. There were talks that today's poor unemployment figure would provide scope for RBNZ to ease monetary policy from current 2.50%. Odds, as implied by market pricing, for rate cut by September jumped from 50% to 60% after the release. Meanwhile, sentiments on Loonie started to reverse after February GDP showed unexpected -0.2% mom contraction. Steep selloff was seen after Ivey PMI dropped sharply from 63.5 to 52.7 in April.