Weak US employment numbers have shaken loose the markets commitment towards consistent tapering in the coming months

By Ian Dobbs*:

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.

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 74K vs 196k expected

·  Canadian Employment -45.6k vs 14.6k

NZD/USD

Price action this week has been dominated by one event. The US employment numbers on Friday. With expectations for a strong result the USD was gradually strengthening heading into the release and this saw the New Zealand dollar trade to the week’s low of 0.8207. But when the actual number missed expectation by a long shot, the market reacted quickly. The NZD snapped higher and has maintained a buoyant tone since. Last night when stop loss buy orders above 0.8330 were triggered the pair leapt higher again and a test of resistance just above 0.8400 looks to be on the cards. I suspect that will cap the strength ahead of tonight's US retail sales number, which will prove very interesting. Another shock result here could see the NZD up through 0.8415, which would then shift the focus to the Oct 22nd high of 0.8540. On the other hand, if December retail sales figures confirm a  healthy spend then we may well be very close to the top of this entire move.

NZD/AUD (AUD/NZD)

After getting rejected from resistance around 0.9300 (support around 1.0753) last week, this NZD proceeded to drift lower with little in the way of fundamental news to drive it. The downside accelerated on Friday evening in the wake of the US employment report. That surprise result saw gains in the Australian dollar outpace those of the New Zealand dollar, and the pair traded down to 0.9207 (up to 1.0861) as a result. In fact, it would be fair to say that recent NZDAUD (AUDNZD) action has been driven to a large extent by broader market flows into the respective currencies, and there has been little direct interest in the pair at current levels. It seems likely we will continue to trade between 0.9100 and 0.9300 (1.0989 and 1.0753) in the near term. Australian employment data on Thursday provides key focus data wise this week.

NZD/GBP (GBP/NZD)

It has been an interesting week for this pair. As the New Zealand dollar slowly weakened late last week, the cross briefly traded below 0.5000 (above 2.0000). But Friday’s release of US employment data turned the market around. As funds flowed out of USD’s in the wake of that release the NZD materially outperformed the GBP. The move was compounded by further soft UK data that had hit the wires a few hours earlier. UK manufacturing production came in well below expectation and this capped of a forgettable week for UK data in general. In the last 24 hours we have seen the GBP continue to come under pressure, and the NZD continue to make gains. The result is that the cross rate has leapt even higher and how sits just above 0.5100. There is a fair amount of resistance around current levels so further gains for the NZD will be much harder fought. Focus for the rest of the week comes from the UK with key data in the form of inflation out tonight, then on Friday we get the latest reading of retail sales.

 NZD/CAD

Last week was a very tough one for the Canadian dollar. Poor data combined with talk of disinflation from the central bank Governor Poloz and a very negative report from Morgan Stanley, to see the currency under the gun. Things didn’t improve on Friday night with the release of employment numbers from both Canada and the US. Both those releases missed expectations by a long shot and the market reaction was swift. The cross leapt higher as the dual drivers of a weaker CAD and stronger New Zealand dollar drove prices. The pair is firmly entrenched in a strong uptrend that started on the 2nd of January from the 0.8660 level. It’s now trading at multi-year highs and trying to call a top to such a strong move such as this is a fools game. When the correction comes it could well be swift, but for now the risks are still skewed to the topside. There is little in the way for data this week from either country to turn the trend.

NZD/EURO (EURO/NZD)

Recent price action in this pair has been dominated by New Zealand dollar outperformance in the wake of the soft US employment data released on Friday evening. As the USD got sold across the board after that data the Euro gained, but to nowhere near the same extent as the NZD, which had actually been drifting lower in the lead up to the release. As a result the pair has snapped higher from levels below 0.6040 (1.6556) to a high of 0.6140 (1.6287) last night. Today’s NZ business confidence data has helped to maintain the positive tone for the pair. With resistance around 0.6100 (support 1.6393) now out of the way the focus turns to the next key level 0.6220 (1.6077). There is little other domestic data from NZ to dive the pair in the near term. However, from Europe we have industrial production, trade balance, the second reading of inflation, and the ECB monthly bulletin.

 NZD/YEN

While many New Zealand dollar crosses have leapt higher in the wake of the US employment data on Friday, the same cannot be said for the NZDJPY. As funds flowed out of the USD the Yen has benefited to a similar extent as to the NZD. This has meant that although there has been some volatility in the cross there has been little overall direction. In the last few hours the NZD has also been helped by a very strong business confidence survey and this is seeing the pair up towards 86.50. With little else scheduled for release this week for either country I expect more ranging as flows in the wider market push the pair around between 86.00 and 87.00.

AUD/USD

There has been one key driver of price action in this pair over the past week and that was the US employment numbers release on Friday evening. The Australian dollar gradually lost ground to the USD heading into the data as the market was expecting a solid result of +200k. But when the actual number of only 74k hit the wires the reaction was swift. The AUD leapt toward 0.9000 and has remained well supported ever since. Another wave of USD selling last night saw the high of 0.9085 trade before prices pulled back a touch. There is plenty of room on the upside for the AUD to appreciate further, although that will likely be determined by US retails sales data out tonight. Another weak result in this data could easily see resistance around 0.9165 under attack. Conversely, a strong result will likely see the AUD back down toward 0.9000. Later in the week from the US we get producer prices, inflation, building permits, and consumer sentiment. The domestic focus this week comes from Australian employment number out on Thursday.

AUD/GBP (GBP/AUD)                            

Data out of the United Kingdom last week has reminded us that it won’t all be plain sailing for the UK economy as it continues to recover into 2014. The market took most of the worse than expected releases in its stride, but Friday night’s manufacturing production data was ‘the straw the broke the camel’s back’. There wasn’t a huge immediate reaction to the release, but that was in large part due to the fact the market was awaiting the more important US employment report, out a few hours later. That data was a big disappointment and as funds flowed out of the USD the AUD dramatically outperformed the GBP. We saw further switching out of GBP and into other currencies last night and this caused the AUDGBP cross to trade right up to resistance at 0.5550 (1.8018). The big question is how much further can this correction run? Any move above 0.5550 (below 1.8018) will target the next (minor) resistance level of 0.5590 (1.7889), and above that there is little in the way of key levels until 0.5730 (1.7452). From Australia the main focus this week will be on employment data out on Friday. While from the UK we get inflation data tonight, then on Friday we get the latest reading of retail sales.

AUD/EURO (EURO/AUD)

There was little overall direction for this pair last week until late on Friday evening when US employment data hit the wires. That very soft result saw funds quickly flow out of USD’s and the Australian dollar was a much bigger benefactor than the Euro. As a result the AUD leapt higher and the momentum has continued in the last 24 hours that pushed resistance at 0.6650 (support EURAUD at 1.5038). So far that has capped the AUD topside, but further gains cannot be ruled out. A sustained move up through 0.6650 (down through 1.5038) would signal a much broader correction is under way. In that case the next target would be 0.6880 (1.4535). Domestically this week the focus is on Australian employment data set for release on Friday. From Europe however we have industrial production, trade balance, the second reading of inflation, and the ECB monthly bulletin.

AUD/YEN

For much of the past week there has been little overall direction for this pair. There have been periods of relative outperformance by the Australian dollar, but in each case the Yen has eventually caught up and the cross has retraced the move. At this point it’s hard to see what could break the pair out of its current range (92.80 - 94.00) that has dominated for much of the past three weeks. The main focus in terms of data will be Australian employment figures set for release on Thursday, which will provide the only chance for some real direction to take hold of the pair.

AUD/CAD

Last week was a very tough one for the Canadian dollar. Poor data combined with talk of disinflation from the BOC governor Poloz, and a very negative report from Morgan Stanley, to see the currency under the gun. Things didn’t improve on Friday night with the release of employment numbers form both Canada and the US. Both those releases missed expectations by a long shot and the market reaction was swift. The cross leapt higher as the dual drivers of a weaker CAD and stronger Australian dollar drove prices. There is certainly room for further gains with late Octobers high of 1.0047 within reach. Whether or not the pair attacks that level could come down to Australian employment data on Thursday which provides the major focus for the week.

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Market commentary:

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

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 added 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.

Europe

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.

Japan

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.

Canada

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.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »