USD weaker on weaker than expected employment data; AUD outperforms as data shows strong inventories and company profits; GBP was a solid performer prior to Thursday's election

By Jason Wong

It has been a fairly sleepy overnight session in markets, with US equities tracking sideways around recent highs, small changes in global bond yields and modest currency movements except for a notable outperformance by the AUD.  For locals returning after a long weekend, much of the price action occurred after the soft US employment report on Friday night.

On Friday night, weaker than expected US employment and annual wage inflation falling to its lowest level in nearly 18 months drove a weaker USD and lower UST yields.  Conviction levels for a Fed rate hike next week remain high at close to 90%, but the path of further rate hikes from there remains murky. Lower-than-even odds are given for an additional rate hike in 2017, while only one further hike is priced through all of 2018.

Overnight, the US non-manufacturing ISM index remained high, with the employment index rebounding strongly.  This adds weight to the case that the soft employment reading will prove to be temporary, while the historically low unemployment rate must (eventually?) lead to higher wage inflation.

The NZD sits just under 0.7150 this morning, its highest level since early March.  With previous technical resistance around 0.71 now behind us, the next area of interest is around 0.7250.

The AUD has outperformed, with data yesterday showing strong inventories and company profits, reducing the chance of a negative Q1 GDP reading tomorrow.  A possible additional factor is the spat amongst the gulf nations.  Saudi Arabia, UAE, Bahrain and Egypt cut diplomatic ties and air and sea routes with Qatar, accusing that nation of backing terrorism and meddling in their internal affairs.  After initially causing oil prices to rise, prices have since fallen, with Brent crude down about 1% to USD 49.50.  Qatar is a major producer of LNG and Australia could benefit if the diplomatic standoff lingers.  The fall in oil prices might reflect expectations of less chance of the production curb extensions recently announced being followed.

AUD is up 0.6% for the day so far and is approaching the 0.75 mark.  In the aftermath of the US employment report and before that Australian data, NZD/AUD reached as high as 0.9624 but the cross currently sits almost a full cent lower from that peak at around 0.9535.  The RBA’s policy announcement this afternoon is expected to continue to run with a neutral policy guidance and shouldn’t have much sustained impact on the market.

GBP has been a solid performer and is up to 1.2910, ahead of the general election on Thursday.  The opinion polls have been coming thick and fast, with varied gaps between the Conservatives and Labour Party, ranging from 1 point to 11 points and an average of 7 points.  As our NAB colleagues in London point out, this is much lower than PM May would have hoped or expected when the election was called in mid-April and although it still ought to translate into a slightly increased majority for the ruling Conservatives, it is hardly a resounding mandate for Brexit negotiations, which are scheduled to resume 19 June.

EUR is trading down slightly to 1.1250.  The key event risk this week is the ECB’s meeting on Thursday.  A Bloomberg survey showed 90% of analysts expecting the ECB to upgrade its risks around the euro area recovery to “balanced”, but analysts are split as to whether the Bank will remove its easing bias on interest rates, with the majority now expecting that to occur next month. We see EUR ultimately heading higher over the balance of the year.

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