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NFP comes worse than expected
The market's risk sentiment has taken another blow.
According to US Non-Farm Payrolls data released today, US economy added only 69K in May vs. 151K expected. April figures were revised down from 115K to 77K. Moreover, the unemployment rate unexpectedly rose from 8.1% to 8.2%.
USD/CAD jumped sharply on the news. USD/JPY’s daily candle is a doji-like formation.
ctemploymentlawblog.com
RBC: buy AUD/NZD
Analysts at RBC Capital Markets recommend buying Australian dollar versus its New Zealand’s counterpart. In their view, AUD/NZD will overcome resistance at 1.30 and rise to 1.33/1.35 in the next 1-3 months.
The specialists think that the Reserve Bank of New Zealand won’t lower interest rates again this cycle. In their view, the normalization in the RBNZ rate expectations may not manifest in kiwi’s outperformance against Aussie as AUD forward curve is more mispriced than the NZD one. In addition, the bank regards AUD/NZD longs as a good way to trade independently of general risk appetite.
Chart. Daily AUD/NZD
BOJ: judging the intervention risk
Bloomberg data shows that Japanese currency lost 10.4% versus its main counterparts in the first 3 months of the year, but then added 12.5% since March. Last week yen, a popular safe haven, has made the biggest weekly advance versus the greenback in 2012. During the resent months USD/JPY has been steadily trading below 1995 minimums in the 80 yen area.
However, analysts at Morgan Stanley note that yen still isn’t overvalued compared with 1995: on a trade-weighted basis yen is “roughly” in line with its average over the past 2 decades and would need to appreciate to about 55 yen per dollar to equal its strength in the mid 1990s.
Japanese authorities keep saying that they are ready to act in order to weaken the national currency. The nation’s Ministry of Finance sold 14.3 trillion yen ($183 billion) in 2011. The last time it sold the currency was on November 4 – the sales were unannounced and came to the market’s attention after the data appeared in February. There’s talk about the BOJ’s stealth intervention on June 1.
Investors don’t believe that Bank of Japan’s intervention will be able to prevent further yen’s appreciation taking into account the current situation in Europe and its negative impact on the markets all over the world. According to PIMCO, the probability of Japan intervening at yen’s current level and pace of change is low as last year yen’s sales were unsuccessful. RBC expects yen to keep strengthening 73 per dollar and 93 per euro by year-end. In their view, “the goal of Japanese officials is to manage the pace of appreciation in the yen and not try to engineer its outright weakness.”
Chart. Daily USD/JPY
Trading EUR/USD
Britain is celebrating the Diamond Jubilee, 60 years of the Queen's reign – UK has a 2-day bank holiday. Trading seems quite, the pairs EUR/USD, GBP/USD and EUR/GBP have little changed.
There aren’t many important data releases either.
08:30 a.m. GMT: Euro zone Sentix investor confidence for June expected -30 from previous of 24.5.
09:00 a.m. GMT: Euro zone PPI for April expected +0.3% m/m.
02:00 p.m. GMT: US factory orders for April expected +0.3% m/m.
The market’s sentiment continues to be risk-off. Investors are still under the impression of Friday’s disappointing US labor market data (US economy added only 69K in May vs. 151K expected, while the unemployment rate unexpectedly rose from 8.1% to 8.2%).
TD Securities notes that though there may be some pauses in EUR/USD decline, the strong downtrend is still in place, so one should sell the pair on its advances to $1.25.
Commerzbank claims that EUR/USD may recover a bit this week, but only as longs as it holds above $1.2288 (Friday’s minimum). Resistance levels for the pair lie at $1.2495 (May 25 minimum), $1.2500 and $1.2625 (January minimum). Below $1.2288 euro will be vulnerable for a slide to 1.2058 (200-month MA) and $1.2000 (psychological level).
Chart. Daily EUR/USD
Westpac: trade in case of the “doomsday”
Analysts at Westpac recommend a type of “doomsday trade”. The specialists felt the necessity of such proposal after US jobs data released on Friday (US economy added only 69K in May vs. 151K expected, while the unemployment rate unexpectedly rose from 8.1% to 8.2%) as the situation may keep deteriorating.
According to Westpac, it’s time to buy US dollar as a safe haven. The currency to be bearish on versus the greenback should be: 1. correlated with global equity markets; 2. relatively illiquid; and 3. from a country with high levels of external financing that would dry up in the event of a global economic problem. The analysts think that New Zealand’s dollar fits all 3 of these conditions.
So, the trade is: go short on NZD/USD at 0.7530 stopping at 0.8350 and targeting 0.5000.
Chart. Weekly NZD/USD
Analysts expect RBA to cut rates tomorrow
Expectations for a rate cut changed dramatically in the past month from just two economists forecasting a cut until a few days back.
The latest Reuters poll shows that the majority of experts (60%) expect the Reserve Bank of Australia to cut interest rates tomorrow. Wall Street Journal survey shows that 10 of 20 economists expect 25 bps cut, 6 expect a 50 bps cut, and 4 expect no change.
Many economists have adjusted their forecast after the weak US Non-Farm Payrolls figures were released on Friday.
Here are some of the forecasts for the RBA rate:
Outcome Looking Ahead
ANZ -25bps Another 50bps by year-end
NAB -25bps Another 25bps cut
JP Morgan -25bps Another 50bps by year-end
HSBC -25bps
TD Securities Hold
UBS -25bps
StanChart Hold
Westpac -25bps Another 75bps cut
Citigroup Hold
CommSec -25bps
Deutsche Bank -50bps
AMP Capital -50bps Several cuts ahead
Moody's -25bps
Barclays -25bps
St George Hold
Macquarie Hold
RBC Capital -25bps Another 50bps by year-end
Goldman Sachs -25bps Another 25bps cut
BankAm-ML Hold
RaboBank -25bps
RBS Hold
AUD/USD lost 5% in May as the demand for riskier assets fell due to the European debt problems, concerns about China’s economic slowdown and US jobless rate. Australian dollar went up to the levels around $0.9700 versus its US counterpart today after $0.9627 in Asia.
Resistance: 0.9770 (May 31 maximum), 0.9800 (May 29 minimum) and 0.9900 (May 29 maximum).
Support: 0.9579 (June 1 minimum), 0.9488 (October 5 minimum), 0.9388 (October 4 minimum) and 0.9313 (September 14 minimum).
Chart. Daily AUD/USD
UBS: short- & longer-term comments
EUR/USD: neutral in the short-term. Recovery is likely. Resistance lies at $1.2650 (38% retracement of the May decline). Support is at $1.2288.
GBP/USD: neutral in the short-term. Upward correction may continue in the summing days. Resistance is at $1.5410. Support lies at $1.5235.
Analysts at UBS claim that the recent weaker than expected data in the US could make the market expect the Federal Reserve to launch the third round of quantitative easing. At the same time, the specialists still favor the safe-haven dollar amongst the major currencies as the Fed’s actions are surrounded with uncertainty, while the rest of the main central banks could resume their stimulus as the crisis in the euro area remains unsolved.
Chart. Daily EUR/USD
CFTC traders positioning data
The latest Commitments of Traders (COT) report for the week to May 29, released on Friday by the Commodity Futures Trading Commission (CFTC), showed the following changes in traders’ positioning in comparison with what was at the week to May 22:
• The net long US dollar positions against other major currencies rose by 7.4% to $37.97 billion, the maximal level since at least 2007.
• The net short euro positions rose from 195K to the new record maximum of 203K contracts.
• The net long pound positions declined last week from 11K to 1.5K contracts. This is the third consecutive week of declines from the maximal level in over a year on May 8.
• The net short yen positions decreased from 18K to 11K contracts improving for the seventh week in a row due to the market’s risk aversion.
• The net short Swiss franc positions declined from 35K to 31K contracts.
• The net long Canadian dollar positions declined from 39K to 34K contracts.
• The net short Australian dollar rose from 17K to 35K contracts, the most bearish level since 2009. Aussie bears are increasing positions for the fourth week in a row.
It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.
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Expectations ahead of the ECB meeting
This week is packed with the major central bank meetings. We’ve already pointed out that the expectations for the RBS rate cut have significantly strengthened in the recent days, what about the ECB?
Policymakers of the European Central Bank are meeting on Wednesday, June 6. In May the central bank left kept the interest rates unchanged at the record minimum of 1% for the fourth month in a row.
Analysts at IHS Global Insight think that the ECB will take a wait-and-see approach. In their view, European monetary authorities would like to wait for the results of Greek elections on June 17 as well as some economic growth figures. The specialists think that the ECB will slash the borrowing costs in Q3, probably in July.
Deutsche Bank points out that the ECB may decide to accelerate a possible policy response before the next Bank Lending Survey in July due to the weaker European economic data, especially the last flash PMIs indicating a significant slowdown in Q2 output after Q1’s flat print. At the same time, the ECB reiterated that the final responsibility for crisis resolution rests on Europe’s politicians. Economists see a cut in the refinancing rate or, less likely, another 3-year LTRO as possible outcomes.
Strategists at BNY Mellon expect no change in the ECB’s rates or stance. However, the specialists think that the central bank may signal that it’s ready to do more. In their view, Draghi is a tricky character to judge so it impossible to know whether he is susceptible to political pressure to cut rates. The bank says the market hasn’t positioned itself towards any solid expectations for the decision, “otherwise the euro would be trading higher.” But there are bets at the margins so the bank expects the euro to strengthen on any remedial action by ECB such as a liquidity injection.
Photo from Crackerjack Finance | Crackerjack Finance – Investing A Step Ahead
June 5: economy, policy and currencies
Today is quite eventful.
Finance ministers and central bankers from the G7 nations will hold an emergency conference call today to discuss the euro zone’s debt crisis.
Traders covered euro shorts in case the policymakers arrive to some new measures. However, investors will keep selling the single currency on its advance. For now EUR/USD dipped below today’s opening price sliding to $1.2490 after testing resistance at $1.2540 earlier today.
Demand for higher-yielding assets improved, Asian equities went up making US dollar and Japanese yen lose versus the majority of their peers. The MSCI Asia Pacific Index of shares added 1% after declining for 4 days in a row.
As it was expected, the Reserve Bank of Australia cut its benchmark interest rate by 25 bps to 3.50%, the lowest level since 2009. Australian Q1 current account deficit came in line with expectations (AUD$14.9 billion). AUD/USD gained after the RBA’s announcement as the markets were ready for bigger cut.
Data to watch today:
9:00 a.m. GMT – euro zone’s retail sales, forecast: -0.1% m/m in April after +0.3% in March.
1:00 p.m. GMT – Bank of Canada’s rate decision: the borrowing costs are seen unchanged at 1%.
2:00 p.m. GMT – ISM Non-Manufacturing PMI: May readings are seen almost unchanged from April level (53.5).
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If you have any questions to our analysts, you’re welcome to ask or comments for this article!