The AUD traded higher yesterday, hitting a two month high of 0.7631 against the USD on much better than expected jobs data. Figures showed that May unemployment fell to 5.5% exceeding expectations of 5.7%. The data was encouraging as it showed that the jobs growth was all in full time employment with 52,100 full-time positions added to the economy while 10,100 part-time ones fell away. This defied previous forecasts of an increase of only 10,000 new jobs.
This net 42,000 rise in May employment marked the 3rd month in a row of strong job creation following on from March +53k , April +46k , there was also an increase in the participation rate which refers to the number of people either employed or actively looking for work, up to 64.9% from 69.4% in April. The AUD/USD is now around 0.7588, with solid support around the 0.7560 mark …look for another push to the 0.7630 resistance level next week, although the ongoing USD strength will prove challenging.
After a high for the week on Wednesday at 0.7317 the New Zealand Dollar tracked lower yesterday, sinking to a low of 0.7184 after being knocked by the stronger USD on the hawkish Fed statement combined with a softer than expected quarterly GDP result. The domestic economy expanded at a slower pace than the 0.7% analysts predicted, growing just 0.5% through the first 3 months of 2017. Having enjoyed a run of strong gains throughout the last month the NZD is now perhaps due for a correction and a consolidated move back toward 0.71 and 0.70 are possible through the short to medium term. With a better result than expected the Australian employment data may just have been the straw that breaks the camels back of the NZDAUD cross. It has been sitting comfortably above the 0.9500 (below 1.0500) level for much of the past 2 weeks, but we now started to see it melt away. We suspect we will see further downside price action over the coming days.
It was all about the Fed yesterday as the widely expected 0.25% rate hike came to pass, with rates now back at the 1-1.25% range, a level not seen since the Global Financial Crisis. Earlier in the day the market was disappointed by lacklustre US Retail sales figures and CPI data which showed a 0.1% fall in headline CPI and only a small 0.1% rise in core CPI. This gives an annualised core CPI reading of 1.7%, a drop from the previous 1.9%, this was the fourth fall in a row for the annualised figure. However the Fed shrugged this data off commenting that it was transitory in nature. Overall the Fed statement was more hawkish than expected as it maintained its view for a third hike in 2017 and aside from acknowledging the drop in inflation, which was downplayed Fed Chair Yellen, as being by attributable to one off factors, everything Yellen said was hawkish. She was bullish, talking up the improvements in the labour market and economy and shared the central bank’s plans to reduce its balance sheet by unwinding asset purchases. The dollar traded sharply higher in response. The Fed also raised its GDP forecasts, lowered its unemployment rate estimates and cut its projection for inflation. However there is some concern emerging that the Fed is tightening in an environment of falling inflation and economic data that may be taking a negative turn. Nonetheless, with the Fed looking beyond the recent weakness and seeing the need for another hike this year, dollar downside should be limited. In other US news the political situation of the Trump administration continues to be eroded by the “Russia” problem with little attention being paid to the implementation of policy. US equity markets were lower again for the fourth time in 5 days as the tech sector continued to sell-off and the Fed statement was further digested. The EUR/USD traded down to 1.1131 overnight , it is currently back around 1.1145 but a break of 1.1110 levels would extend to 1.1075 then 1.1030, we look for these levels next week.
The political woes of the Conservatives forming a workable government continue to grind on and with Brexit negotiations scheduled to start on Monday adding further pressure. The Bank of England left rates on hold at 0.25% at yesterday’s Monetary Policy meeting, but what was surprising was a split vote as three BoE officials called for UK rates to rise, signalling that they are more concerned about rising inflation even though there are signs the economy is slowing. The GBP spiked up against both the USD and EUR after the meeting minutes were released. The MPC said inflation had picked up more quickly than expected in since its last economic forecast in May. It also commented that a further fall in the value of the pound since its last evaluation of the economy would also add to upward pressures on inflation. The minutes said there was a risk that inflation would rise “above 3% by the autumn”, above the 2.8% peak the BoE had previously forecasted for the second half of the year. MPC officials noted that measures of domestically generated inflation were picking up even as economic growth slowed to 0.2% in Q1. However what was also of interest was the growth in employment was accompanied by continued weak wage growth, unemployment is now at its lowest level since 1975. The GBP/USD is currently trading lower, around 1.2781 following the release of softer-than-expected Retail Sales figures, down by 1.2% in May, following a revised gain of 2.5% in April, after a high of 1.2815 earlier this week. We expect little further action in the GBP ahead of Monday’s Brexit negotiations, next immediate support is away at 1.2750 then 1.2705…but that is next week’s story.
The old Greece crisis was back on the table yesterday, as it avoided a summer default last night, securing EUR 8.5bio in bail-out funds even as creditors dashed Athens hopes for a more comprehensive debt relief deal. It follows a crunch meeting in Luxembourg that also paved the way for the International Monetary Fund’s participation in the country’s third rescue package. Eurozone officials said Greece would have to wait for “final decisions” on reducing its debt burden. However, creditors outlined a package linking relief to the country’s economic performance amid tough fiscal targets for a country ravaged by recession. IMF head Christine Lagarde, said greater clarity on debt relief and efforts by the Greek authorities to implement reforms opened the door to an “approval in principle” for up to €2bn in IMF assistance, she conceded that the agreement was a “second best solution”, but ensured that the country had avoided another financial crisis. Surprisingly the Greek economy is now 27% smaller than it was in 2008. Choppy trading in the EUR/USD saw the EUR soaring to a new 2017 high at 1.1295 after the poor US inflation and retail sales data, then dropping sharply to 1.1131 after the upbeat Fed statement…we expect the EUR to continue to correct lower next week.
The JPY saw choppy trading over the last 24 hours, hitting a low of 108.80 after the weaker US data releases then bouncing back to a 110.97 high last night after the Fed statement, is currently trading around 111.16 with the USD extending previous gains as the Bank of Japan kept rates on hold as widely expected. A press conference will be held later today by BoJ Governor Kuroda where he is likely to reiterate bank’s commitment to meet the 2% inflation target. Traders would want to hear from Kuroda about the QE exit strategy, with any comments about QE taper/balance sheet reduction seen to strengthening the bid tone around the Japanese Yen. A break of 111.27 would target resistance at 111.57….a break of downside support at 110.90 would expose 110.56 , but we favour consolidation at current levels to end the week.
USD/CAD movements have also been whippy over the last few days, after a 1.3468 high earlier in the week, it has traded down to the 1.3164 mark and is now back around the 1.3262 level. Most of this movement has been due to the heightened USD volatility, despite better manufacturing data the USD/CAD is struggling to find upward momentum and especially with the oil price (WTI) below US$45/brl the CAD will continue to make heavy work to make significant inroads on its recent losses. Immediate resistance is at 1.3300, then 1.3365. The week’s low around 1.3165 is critical support, but unlikely to be tested until next week.