US payrolls escalate the odds
Last Friday US non-farm payrolls disappointed expectations as they were less than half of the expected 150k increase in jobs – actual figures come out at 69k. US unemployment rate rose to 8.2% from the previous 8.1%. These figures were maybe the cherry on the cake after a week full of worrisome figures from the US.
From the previous week US consumer confidence, annualized GDP, and Chicago PMI (amongst others) all slipped lower. The data reminded investors that the US was not immune to a slowing global economy.
As the data hit the wires the EUR/USD initially slipped to 11 month lows at 1.2288 but the euro soon took the lead rising to 1.2542 in last Tuesday’s European session and in the process garnering around 2%, when seen against the USD. The buck weakened as the likeliness of a third round of QE from the Fed weighed on the USD.
We must remember that the prospect of more monetary easing more often than not is a short term drag on the currency in question, as money supply increases and yields become lower. This explains why the USD weakened after last Friday’s the payrolls data.
Overall we expect Forex markets to remain volatile as investors try to balance out; on one side risk aversion on the back of the subsiding economic growth (quitting risk for the safer haven); and on the other side the possibility of more easing from the Fed.
Risk aversion favours support for the USD (amongst others) but the prospects of more QE, as previously mentioned, is USD-negative. In the end however we expect that heightened risk should tilt the balance in favour of the “safe havens” (if there are any left!) typically the USD and the JPY.
As the outlook for economic growth remains hazy and increasingly unclear, investors are now asking themselves whether the German inspired austerity could be actually sabotaging growth and Francois Hollande’s drive for growth, just a few weeks ago, immediately comes to mind.
Last Tuesday a G7 conference call was expected to put the euro zone’s largest economy under pressure to do more to stimulate growth. Media reported that Spain, the EZ’s 4th largest economy was the major concern. Yet however the G7 opted not to release any statement after the teleconference.
Within the EZ Greece has lost the limelight, at least for now, as investors wait for the outcome of the Greek elections on June 17th. Meanwhile the credit rating agency, Standard and Poor’s has attributed a one-in-three chance of a Greek exit – but luckily enough added that the chances of other sovereigns following are “unlikely”.
Spain captures investors’ focus; with the issues revolving around its banking sector and the recapitalization requirements. It was reported that Germany urged Spain to enter into an IMF program – something which so far Spain has decline to do.
With regards to our outlook for the EUR/USD, as reiterated last week:“Given the weaker fundamental data out of the euro zone and the region’s austerity-growth Armageddon we would expect the bearish bias to remain predominant. In the coming weeks; to the downside” (the EUR/USD) “may be eyeing 1.20/1.1876 while upward moves should not breech 1.29/1.30 – the upper line of the bearish channel.”
From the US, Bernanke’s testimony to congress on the US economic outlook due next Thursday will be eyed, as investors will be waiting for further direction.
Early into last Tuesday’s session the RBA cut its overnight cash rate by 25bp despite earlier forecasts for a 50bp cut - thus putting the rate down to an effective 3.5%. The central bank cited the economic weakness in Europe and a more moderate Chinese growth as the main reasons. After the news was released, the AUD/USD traded up to 0.9803 boosted by short-covering before easing to 0.9710.
We expect the AUD/USD, trading 0.9740 at the time of writing, to find resistance in the region of 0.9862 - 1.0038 for the current week. To the downside the currency pair should find support at 0.9406 – 0.9546.
Tuesday as well the Bank of Canada chose to remain on hold at 1 %, as was expected. In a statement following the monetary policy decision, the central bank once again signaled that it may raise the key rate later, but softened its hawkish stance.
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