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Kiwi falls on unemployment figures
The New Zealand dollar weakened on Thursday after a report showed today the unemployment rate in the country unexpectedly rose.
The unemployment in the first quarter overcame the consensus forecast 6.3% and reached 6.7% after 6.4% in Q4. However, number of employed people increased by 0.4% compared with a 0.2% increase in the prior quarter. According to economists, the jobless rate surge was caused by a significant increase in number of people looking for a work.
UBS: Today’s unemployment report may contribute to lowering the RBNZ inflation outlook and may create scope to ease monetary policy.
The next RBNZ meeting is scheduled on June 14. On the previous meeting the bank tried to push the kiwi lower, giving hints on possible dovish actions.
NZD/USD dropped to $0.8062 (200-day MA) today, breaking the $0.8080 support (38.2% retracement from a Dec.2011-Jan.2012 growth). Strong support for the pair lies at $0.7965 (50% retracement) and at $0.7845 (61.8% retracement).
SocGen: trading ahead of ECB meeting
Analysts at Societe Generale recommend going short on the euro against the dollar, entering the trade at $1.3250, targeting at $1.2900 and with a stop at $1.3400.
According to analysts, the common currency may edge up, but than drop to the lowest level since January. However, French and German elections and the ECB meeting may weigh on the cross.
Specialists do not expect anything special from the today’s ECB meeting, but the market is ready for surprises this week after the RBA unexpectedly cut the key interest rate on Tuesday. Europe definitely needs to do something to stimulate the economic growth, but it’s difficult to say when and what measures be used.
ECB: austerity vs. growth
What fate awaits the common currency and the euro zone? In quest of the answers, markets expect the ECB meeting (Wednesday, 13:30 GMT) with impatience. Moreover, today Spain holds its first 3- and 5-year bond auction since S&P cut the countries credit rating BBB+ last week.
The ECB has added more than 1 trillion of cheap euros into the banking system and cut interest rates to a record low of 1.0% in December to stimulate growth. Some analysts believe that the ECB funding operations, launched in December and at the end of February, supported the indebted periphery countries and prevented a global credit crunch.
However, according to recent economic releases, including the PMI’s, eight euro zone countries are now in recession, while others are struggling to grow. The discontent with the austerity measures in the region grows, making the current European leaders extremely unpopular.
Market participants understand the euro zone’s economy requires a supporting stimulus, but analysts split over the terms and the instruments of the policy easing.
Danske Bank: Recent economic data is mixed, but not so weak that it will trigger a rate cut. The ECB remains in ‘wait and see’ mode as it assesses the impact of the two 3-year LTROs.
There is a speculation that the ECB policymakers are planning to replace the “fiscal compact”, signed in March, by a so-called “growth compact”. However, according to analysts at Danske Bank, the renewed focus on growth does not necessarily mean the rate cut in June.
Societe Generale: It seems too early for another wave of easing, but that is where the risks are skewed. The outcome is continued downward pressure on EUR/USD. We still expect it to break below $1.30.
Markets on the watch for NFP
According to the recent ADP Employer Services report, the number of employed people grew by 119K workers in April (the smallest increase in the last seven months). The figures fell below the estimated 170K growth and 201K gain in March.
CMC Markets: The release suggested that the surprisingly weak March U.S. non-farm payrolls weren't a one-off stutter and that the U.S. recovery may be losing momentum.
Factory, manufacturing and construction sectors reduced the number of jobs in April; however, the reduction was slightly offset by the increase of services sector jobs.
On Friday (13:30 GMT) non-farm payrolls release is scheduled. Investors are scratching heads: whether or not the figures will come in line with forecasted 176K. In March employment changed by 120K jobs. Negative NFP report will definitely revive talks about the further monetary policy easing.
The ISM Manufacturing PMI came out better than expected on Tuesday (54.8 vs. consensus-forecast 53.0 and 53.4 in March). However, ADP report makes rapid economy rebound look challengeable: U.S. labor market is obviously far from recovery.
AUD/USD drops further on RBA statement
The Australian dollar keeps weakening against its major counterparts because of the investor’s bets on further rate cuts increased.
According to the RBA Monetary Policy Statement, released on Friday, the RBA sees average growth of 3% in 2012, down from a February estimate of 3.5%. Consumer prices will rise 2.5% in the year to December, from a previous prediction of 3%. Underlying inflation is predicted to be at 2.25% from a previous 2.7%, the central bank said.
U.S. non-farm payrolls data, eagerly awaited today (13:30 GMT), may influence on the cross strongly. Economists forecast the number of employed people to grow by 176K in April compared with 120K increase in March.
BMO Capital: If the NFP report comes stronger than expected (higher than 176K), go short on AUD/USD. Reserve Bank of Australia lowered the key interest rate this week and, given the problems of the Australia’s economy, may cut them further. On the contrary, positive NFP figures will make the Fed unlikely to loosen monetary policy.
AUD/USD declined 1.8% this week and is currently trading in the $1.0262 area. Resistance for the pair lies at 1.0300, 1.0395, 1.0420, 1.0450, 1.0475 (local maximum), while support – at 1.0245, 1.0225 (local minimum) and 1.0200.
ECB press conference: highlights
The European Central Bank’s meeting, held on Thursday, was one of the most expected events of the week for the currency market.
The ECB left the benchmark rate at a record 1% low. Some market marticipants, however, expected the rate cuts after ECB President Mario Draghi last week said the bank was changing the growth and inflation outlook.
According to Draghi, the economic activity stabilized at low levels in Q1 2012. The inflation in 2012 is likely to exceed the target 2% level due to commodities price and indirect taxes growth. Downside risks are still strong, but the ECB forecasts a slow economic rebound in 2012.
ECB President has partially dispelled investor’s hopes on a third round of the LTROs: according to him, the positive effect of the second LTRO is yet to come. Mario Draghi said the operations supported the financial sector to avoid a credit crunch and strongly improved the funding conditions for the banks.
Nomura: The ECB will wait to see how its lending to banks will feed into the real economy. Economic conditions need to deteriorate significantly in the weeks ahead before the ECB will consider loosening monetary policy further at the June meeting.
Commerzbank: There are significant downside risks to the ECB’s growth outlook. Draghi indirectly hinted at next month’s ECB meeting when the bank will publish its new projections. Since the ECB may lower its growth forecasts, the rate-cut discussion will stay with us.
Berenberg: The pain threshold of the ECB for more policy action is high and has not been reached. Deteriorating survey data may be revisited at the next meeting, leaving the door for policy action at the June meeting open very slightly.
GBP/USD down throughout the week
The British pound declined 0.6% against the dollar this week after a five-day downward movement. The decline followed by two weeks of steady growth.
This week a bunch of negative data was released in Britain. The Halifax house price index in April dropped 2.4%, demonstrating the largest monthly decline since September 2010 (vs. forecasted 0.4% decline and a 2.2% growth in March). Manufacturing and services PMI declined in April, but still indicate the industry expansion (50.5 and 53.3 respectively), while construction PMI edged up to 55.8.
According to analysts at Charmer Charts, GBP/USD still remains under pressure with $1.6140 as a nearby objective.The upward correction is contained by $1.6220.
Dollar grows despite low NFP
The greenback strengthens versus its major counterparts on the back of U.S. labor market data reports.
The U.S. economy created 115K new jobs in April, missing expectations at +170K and slightly down from March +120K . However, the unemployment rate surprisingly fell to 8.1% in April from 8.2%.
Standard Chartered: It’s a weaker report overall. It’s not weak enough to make the market convinced that quantitative easing is coming soon. There’s not yet enough confidence of that, but it’s starting to raise a few more concerns.
BNP Paribas: The labor market is gradually improving, but it’s still weak. The data is not reassuring for the Fed, though it’s not catastrophic either.
Goldman Sachs: UK vs. Spain
According to analysts at Goldman Sachs, Britain’s and Spain’s economies have a lot in common. Does it mean that their chances to resolve the crisis successfully are equal? Not really. Specialists expect the UK to “muddle through” while Spain will have to deal with the “long grind”.
Analysts point the countries faced similar problems due to the crisis: debt to GDP doubled, real GDP has not returned to its 2008 levels, the bursting of a property bubble, current account deficits and huge budget deficits.
However, Goldman Sachs’ report shows that their means and resources to come out of the crisis are different. Firstly, own currency and own monetary policy gives a significant advantage for the UK. The Bank of England is free to loosen monetary policy and to lower rates, while Spain is limited by euro zone’s monetary policy, equalizing economic interests of 17 different countries. Secondly, UK labor market is much more flexible than Spanish.
Moreover, situation in the housing market is also different in UK and Spain. Construction in Spain weighs much more than in UK: in Spain it reached close to 20% of GDP, meaning that millions of workers will have to be relocated to the other sectors, putting an additional pressure on the labor market. Furthermore, buildings under construction account to 6% of GDP in 2012 (in UK – 3%). Finally, in Spain a huge percent of properties remains vacant.
French elections: pessimistic scenario
On Sunday, May 6, the French hold the second round of their presidential elections. French centre-right President Nicolas Sarkozy is widely expected to lose to his socialist rival Francois Hollande, possibly becoming the first one-term French president in over 30 years.
Financial markets seem to underestimate the danger for the common currency coming from the program, proposed by François Hollande. The Socialist party candidate insists on the re-examination of the euro zone’s austerity policy, pursued by Nicolas Sarkozy in consort with German Chancellor Angela Merkel. According to Hollande, in case of victory he will aim for the revision of the “fiscal pact”, signed in March, and focus on the region’s growth.
Some analysts believe the strict austerity measures supported the indebted periphery countries and prevented the euro zone’s collapse. Others, however, argue that austerity only hinders growthand rest responsibility on the incumbent Europe’s leaders.
Francois Hollande wants to lead the European Central Bank to enlarge money printing programs. He has campaigned for an issue of the common European euro bonds, something that Germany has always opposed. Socialist Hollande seems to set himself up as Merkel’s political antipode, acting on behalf of the oppressed European nations. The question is whether this is nothing more than a pre-election rhetoric or his real political intentions?
The disaccord between the euro-zone’s key leaders during a complicated phase of the region’s history may weaken the common currency against its other counterparts. Spain and Italy may be the first victims of the political shift. Furthermore, yields on French bonds may also rocket, expanding the budget deficit. In such case scenario we can see the downgrade of the country by the rating agencies and the escalation of the domestic, regional and global debt crisis.
On Sunday eyes are on another important political event - elections in Greece are threatening to split the parliament and to hinder the well co-ordinated work of the government during the severe crisis. The economic risks and the unstability in the country are still high despite the fact that S&P has raised the Greece's credit rating recently.