Stalling US labour market is underminning expectations of immediate tapering from the Fed and is starting to impact markets

By Ian Dobbs*:

The patchy global recovery continued its slow grind last week.

Better economic news in China, Australia and the UK has seen an improvement in sentiment, while the US labour market seems to have stalled.

This stalling US labour market undermines expectations of immediate tapering from the Federal Reserve, and this has started to impact markets globally.

Longer end interest rates have stalled their move higher for the most part, and the US dollar demand has lowered correspondingly.

Add to the mix the intriguing international relations dance around treatment of the Syrian situation, and most markets continue to trade within their increasingly familiar recent ranges.

With most central banks expected to maintain steady monetary policy in the near term, the focus will remain on the US Federal Reserve in the coming weeks.

Major Announcements last week:

·  Chinese Manufacturing 51.0 vs 50.6 expected

·  Australian Building Approvals 10.8% vs 4.1% expected

·  UK Manufacturing PMI 57.2 vs 55.2 expected

·  Australian Retail Sales +.1% vs +.4% expected

·  US ISM Manufacturing 55.7 vs 54.2 expected

·  Australian GDP +.6% as expected

·  UK Services PMI 60.5 vs 59.3 expected

·  US Non-Manu PMI 58.6 vs 55.2 expected

·  Canadian Unemployment rate 7.1% vs 7.2% expected

·  US Unemployment rate 7.3% vs 7.4% expected

·  RBA, BOC, ECB, BOJ and BOE leave monetary policy unchanged

NZD/USD

The New Zealand dollar has been appreciating against the USD since the beginning of September. Much of the move higher last week came as geo-political concerns around Syria reduced. The NZD was also helped by a strong AUD that is benefiting from some improved data domestically and out of China. The latest leg high came on Friday night after disappointing US employment data hit the wires. That saw the USD lose ground across the board and the NZD trade up over 0.8000 where it currently sits. The next level of resistance comes in just above 0.8100 although that might prove a step too far ahead of the RBNZ monetary policy statement on Thursday. Key data out of the US this week is all released on Friday in the form of retail sales, producer prices, and consumer sentiment.

NZD/AUD (AUD/NZD)

Since breaking down below key support and trading to a low of 0.8577 (1.1659)last week, the New Zealand dollar has staged something of a recovery against the Australian dollar. That recovery peaked at 0.8714 (1.1476) on Friday evening and leaves the near term picture very muddled. Although I still favour another test of the down side, the risks are very evenly balanced and direction from here is a tough call. The current level of 0.8685 (1.1514) is pretty close to the middle of the expected range for the rest of the week. The last two trading days have seen little interest in the pair and it has kept a tight range. This could well continue ahead of the RBNZ on Thursday. From Australia this week we have business confidence, consumer sentiment, and employment data to focus on.

NZD/GBP (GBP/NZD)

The New Zealand dollar has continued to drift higher against the Pound Sterling helped on Friday night by some poor trade balance data from the UK. A surprise drop in exports does put a question mark over the outlook for the UK manufacturing sector that has been performing well over the last few months. That data saw the pair trade towards the middle of the now well-defined 0.5000 - 0.5250 (1.9048 - 2.0000) range that has dominated trading since the end of May. Expect quiet trading ahead of the UK’s employment data out on Wednesday night, and the RBNZ monetary policy statement on Thursday.

 NZD/CAD

The NZ dollar saw grinding appreciation over the Canadian dollar throughout the course of last week. Lower levels of global risk aversion coupled with better than expected data in China and Australia to provide the boost in demand for the NZ dollar. The NZD appreciation was capped on Friday following the strong Canadian employment numbers and this saw the pair fall short of the resistance at .8350. This remains the initial target for any further appreciation in the immediate future. Following yesterday’s strong Canadian building consents number, the RBNZ monetary policy statement on Thursday becomes the primary focus. Any further appreciation for the NZ dollar should prove harder fought from current levels, which offer relatively good value buying of CAD with NZ dollars.

NZD/EURO (EURO/NZD)

The New Zealand dollar continued to appreciate against the Euro last week as geo-political tensions around Syria subsided and the ECB struck a very cautious tone at their monetary policy meeting. Improvements in the Euro area are very gradual and it is certainly being left behind as the US and UK recoveries gain momentum. This pairing traded up to resistance at 0.6100 (support 1.6393) before drifting back to 0.6050 (1.6529) where it currently sits. Expect 0.6100 (1.6393) to continue to cap the NZ dollar topside ahead of the RBNZ monetary policy statement on Thursday. There is a lack of key data out of Europe this week with only industrial production and the ECB monthly bulletin drawing focus on Thursday evening.

 NZD/YEN

This pairing has seen strong gains over the past week. These gains have come on the back of an easing in geo-political concerns around Syria and better data from both Australia and China that has helped support the NZD. There is strong resistance between 80.00 and 80.40 which has capped any strength since the pair broke down in early June. This resistance should prove tough to overcome in the near term especially as the market awaits the RBNZ monetary policy statement on Thursday. Also on Thursday we get the minutes from the BOJ’s last policy meeting.

AUD/USD

The Australian dollar has had a good run against the USD since the beginning of the September. Helped by an improvement in data from both Australia and China, and a more neutral RBA, the currency has reached its highest level in over a month to the USD. The latest leg higher came on Friday night after disappointing US employment data saw the USD under pressure across the board. Current levels offer some resistance with any potential move higher targeting 0.9320, which was the high from back on July 24th. From Australia this week we have business confidence, consumer sentiment, and employment data to focus on. While from the US we get retail sales, producer prices, and consumer sentiment all released on Friday.

AUD/GBP (GBP/AUD)                            

Gains in the Australian dollar over the past week have seen the cross to the Pound Sterling recover from recent lows near 0.5750 (1.7391). These gains have come on the back of a more neutral RBA as well as better data out of Australia and China. Resistance around 0.5930 (support 1.6863) has yet to be tested and this level needs to be overcome before further gains can be considered. This week has started off quietly and it remains to be seen whether Australian data in the form of business confidence, consumer sentiment, and employment figures will provide the impetus for such a move. The UK has a light economic calendar this week with just the unemployment data on Wednesday and inflation report on Thursday to focus on.

AUD/EURO (EURO/AUD)

The Australian dollar made good gains against the Euro last week as geo-political concerns eased and the RBA took a more neutral stance. Although the Euro-zone is improving, the gains are incredibly gradual and this was reflected in the cautious tone from ECB president Draghi on Thursday. The pairing broke above resistance at 0.6910 (support at 1.4472) mid last week, and although gains have slowed the focus is still on the topside. The .6910 (1.4472) level now provides the first level of AUD support and the market hasn’t even looked like testing it so far this week. Over the coming days from Australia we get business confidence, consumer sentiment, and employment figures. While from Europe there we have industrial production and the ECB monthly bulletin to focus on.

AUD/YEN

The Australian dollar has been making relentless gains against the Japanese Yen since the beginning of September. These gains have come as geopolitical concerns have eased and we have seen improved data from both Australia and China. The pair is now trading its highest level since late July and a test of resistance around 93.00 could be next on the cards. That level should prove tough to crack have capped price action on two previous occasions since the pair broke down in early June. Over the coming days from Australia we get business confidence, consumer sentiment, and employment figures. From Japan the focus will be on the minutes from the latest policy meeting released on Wednesday.

AUD/CAD

After making good gains on the back of Australian dollar strength in the first half of last week, this pairing lost momentum as the Canadian dollar gained some support. This was helped on Friday night by better than expected Canadian employment data and yesterday’s strong building consents. The pair now trades around 0.9585. Recent highs at 0.9642 provide the first line of resistance and this should cap the topside for now. There is support on the downside at 0.9530 and then again at 0.9440. From Australia this week we have business confidence, consumer sentiment, and employment figures to drive price action. While from Canada we have house price data and capacity utilization to focus on.

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Market commentary:

The patchy global recovery continued its slow grind last week. Better economic news in China, Australia and the UK has seen an improvement in sentiment, while the US labour market seems to have stalled. This stalling US labour market undermines expectations of immediate tapering from the Federal Reserve, and this has started to impact markets globally. Longer end interest rates have stalled their move higher for the most part, and the US dollar demand has lowered correspondingly. Add to the mix the intriguing international relations dance around treatment of the Syrian situation, and most markets continue to trade within their increasingly familiar recent ranges. With most central banks expected to maintain steady monetary policy in the near term, the focus will remain on the US Federal Reserve in the coming weeks.

Australia

Last week was a noticeably better one for the Australian economy and the AUD. There were a couple releases, in the form of building approvals and GDP, which beat expectation and help to support the currency. The RBA monetary policy statement also supported with a lack of reference to more direct cuts in the cash rate. This more neutral stance saw the currency make good gains across the board. On top of this the recent data out of China has shown improvement and that has helped to allay fears of a hard landing in their economy. The improved sentiment has continued to support the Australian dollar that has been under pressure for much of this year. Over the rest of this week we get readings on business confidence and consumer sentiment followed by employment data on Friday.

New Zealand

Last week was relatively quiet week for news on the New Zealand economy. The latest terms of trade index revealed a higher than expected result, which bodes well for exporter health. Also of note has been the improvement of the economic news of integral trading partner economies of Australia and China. Both seem to have stabilized after a recent run of weaker news. This week’s focus comes from the RBNZ’s monetary policy announcement on Thursday. With no change expected to the emergency low cash rate of 2.50%, the accompanying statement will be closely watched for further insight to the timing of a possible cash rate hike towards the end of the year, or early in 2014. Subsequent to the announcement on Thursday, is Governor Wheeler’s testimony before the Finance and Expenditure select committee. This offer further opportunity for Gov. Wheeler to communicate, and therefore his comments will be closely followed.

United States

Most of the data out of the United States last week was supportive of an improving recovery. Both the manufacturing and non-manufacturing sectors are expanding at levels not seen for nearly two years. But key to the recovery and the Feds monetary policy going forward, is whether this is translating into more jobs. To that extent on Friday we got the employment report for August which was a little disappointing. The headline figure of +169k was a touch below expectation, but more worryingly were the revisions to previous month’s data to the tune of -74k. The net result is that the number of jobs created over the past few months is only just keeping up with population growth. This does leave a question mark over the recovery, and the Fed will want to see better gains over the coming months as they start tapering asset purchases. This week’s data highlights all come on Friday with retail sales, producer prices, and consumer sentiment set for release.

Europe

Data out of Europe over the last week has mostly reinforced the ever so gradual improvement in the region and the outlook for a slow recovery. ECB president warned last week that he is ‘very, very cautious’ and rightly so as there are many hurdles for the region to overcome. There have however been some improving signs from the likes of Greece and Spain that indicate their economies could be starting to turn the corner. Figures released on Friday showed the Greek economy shrank by 3.8% in the second quarter, which is significantly less than the -4.6% estimate. This is it’s smallest contraction since 2010. While in Spain it looks like the economy could stop contracting altogether in the second half of 2013, after two years of recession. Second quarter GDP shrank by only 0.1% down from -0.3% in the first quarter and -0.8% at the end of 2012. This improvement has seen the spread between Spanish and German long term interest rates fall to its lowest level in more than two years. There is a lot of second tier data out this week, the highlights of which will be industrial production and the ECB monthly bulletin.

United Kingdom

For much of last week the UK continued to release economic data that showed the economy is firing on all cylinders. The manufacturing, construction, and service sectors are all operating at levels not seen since before the crisis. However the recent run of solid data finally hit a small speed bump. On Friday night we got two data released that show there is still plenty of work to do. The first was manufacturing production that edged ahead in July by 0.2%. This was a touch below the expectation of 0.3%, but the month on month increase does build on strong growth the previous month. What was more of a concern was trade balance data that showed a worrying fall in the level of exports. Exports fell 9.3% and caused the trade deficit to increase to GBP9.9 bln. A sharp fall in exports to non-EU countries was responsible for the decrease and this does dent the recovery hopes for the manufacturing sector. This will most likely be one of many obstacles the recovery faces over the coming months and it will be anything but plain sailing for the economy going forward. That being said, there is definite momentum building which will be pleasing for both the government and the central bank. There is a much lighter calendar this week with just the unemployment data on Wednesday, and inflation report on Thursday to focus on.

Japan

Last week saw the Bank of Japan (BOJ) leave its monetary policy setting unchanged as expected. Of more focus is the lead up to a decision from Prime Minister Abe with regards to the timing of a sales tax increase to help relieve the Govt debt load. This is very important, as the previous introduction of sales tax in 1997 pushed the fragile economy back into recession and led to a decade of much maligned stagnation. Of interest has been the positive comments from BOG Governor Kuroda that the economy is now robust to withstand the added pressure of increased taxes. The Japanese economy was the best performing economy of any advanced economies in the first half of 2013, albeit the latest readings have not proved so encouraging. With mainly second tier economic data due for release this week, expect the news to be of limited impact to the price action. Of more impact will be the on-going focus on the sales tax, and the wider markets level of risk aversion with an immediate eye on developments in Syria.

Canada

Last week was an interesting one for the Canadian economy. Whilst leaving monetary policy unchanged as completely expected, Bank of Canada (BOC) Governor Poloz lamented a global economy and its negative impact on the levels of investment in Canada. This sentiment certainly points towards little prospect of increasing interest rates in the short term. However, the employment numbers on Friday were of stark contrast. They were stronger across the board, with both part and full time components stronger than expected. This saw the unemployment rate fall to 7.1% and provided a boost to demand for the Canadian dollar, albeit not materially against the NZ and Australian dollars. This week sees a quiet economic calendar, with yesterday’s building approval data of any note. This reversed the previous weakness, with a jump in activity, albeit in a notoriously volatile series of data.

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