U.S jobs data spurs dollar demand
As expected, the latest U.S payroll data provided the direction for currencies on Friday. According to the Bureau of Labor Statistics, the U.S economy created 236,000 jobs in February, in excess of the 165,000 estimated. The finer points of the data showed gains in professional and business services, construction, and health care. January’s net growth was revised down to 119,000 from the originally reported 157,000. The official unemployment rate fell to a 4-year low of 7.7 percent.
The question on everyone’s lips is of course how does stronger jobs growth change the Fed’s outlook? And does it add weight to the case for the FOMC to scale back asset purchases sooner than anticipated? While it may strengthen the case brought forward by those Fed hawks advocating a gradual unwinding of stimulus, we’re likely to see more guarded optimism from the dovish – and highly influential – end of the board, Bernanke and Yellen.
In a speech last week, Vice Chair Janet Yellen – and likely successor to Chairman Ben Bernanke – defended the Fed’s easing initiatives, noting: “At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program.”
Nonetheless, market reaction in the ensuing period of Friday’s NFP’s (and other outperforming data in recent weeks) suggests investors are quietly recalibrating Fed stimulus expectations. While in recent years an event such as Friday’s jobs data may have induced a risk rally (U.S dollar weakness), we judge U.S dollar strength as indicative of growing expectations the Fed will begin to curtail some $US85 billion in monthly asset purchases sooner than previously thought.
On the assumption the U.S dollar retains its ability to rally in times of market turmoil and strengthen on outperforming (top-tier) data, we see conditions broadly in its favor. There is however a case to suggest markets may have suitably priced-in chances of an early than expected scaling back of asset purchases, which will no doubt be tested in the week ahead with a few key releases on the docket. In turn, it would be wise to expect more moderate appreciation from the greenback should data continue to point to stronger economic conditions, especially in light of the uncertainty surrounding the sequestration.
Whatever the case, the days of a uniform ‘risk-on/risk-off’ response to key data and global themes have made way for a far more complicated set of directives, with Fed easing expectations front and centre.
U.S Data points of interest
Tuesday – U.S Monthly Statement
Wednesday – Advance Retail Sales | Business Inventories
Thursday – Current Account Balance | Producer Price Index | Weekly Jobless Claims
Friday – Consumer Price Index | Industrial/Manufacturing Production | University of Michigan Consumer Confidence
Aussie at the Fed’s mercy; Unemployment data in frame
Friday’s reaction to the U.S non-farm payrolls release serves as an important reminder of just sensitive risk currencies are to U.S stimulus. In years gone by outperforming non-farms may have induced a flight to high-beta assets and currencies like the Australian dollar, however, ‘good news’ is sometimes bad when you take into account the Fed’s quantitative easing efforts. Friday’s flight to the U.S dollar after the solid payroll numbers suggest markets are slowing acknowledging the Fed’s potential for the scaling back asset purchases.
While it may be premature to expect sustained weakness from the Aussie dollar based on this alone, its apparent Fed stimulus has underpinned the Aussie’s ascent, and will eventually be a catalyst to pave the way lower. Instead of benefiting from a risk induced rally, the local unit hit the skids after the U.S jobs reports, settling around half a cent lower by the close.
Still, the local unit fared better than its major counterparts, forging fresh 4 – 1/2 highs against the Yen and 28-year highs against sterling. For this we can attribute to a two-fold effect of both Yen and Sterling weakness, while the Aussie retains both its yield advantage and safe-haven properties as a currency tied to a fundamentally sound economy.
Expectations the RBA will continue easing through 2013 have also abated. As of Friday just 24-percent of the market expects Governor Stevens and Co will slice another 25bps off the official cash rate in April.
The Aussie has opened on the back foot this morning in very thin volume following inflation data out of China over the weekend showing stronger than expected consumer prices growth amid weaker industrial output and retail sales. Inflation grew 3.2 percent annually in February according to the government release, a significant increase from 2-percent in January. Economist’s estimates showed expectations of around 3-percent growth on year.
Although recent feedback from hardly suggest the economy is falling off a cliff, it’s clear the government remains in the delicate situation of balancing efforts to promote stronger growth without igniting inflation.
While trade data on Friday show a surprise surplus, the imports component of the index fell well short of expectations, suggesting a material short-fall in domestic driven demand.
The local economic highlight this week will be Thursday’s jobs data which is expected to show the economy added 10,000 jobs in February with the unemployment rate edging up from 5.4 to 5.5 percent.
Australian Data points of interest
Tuesday – NAB Business Conditions/Confidence | Westpac Consumer Confidence
Wednesday – Home Loan Activity
Thursday – Employment Change / Unemployment Rate