AUD in trouble?

The Australian dollar is relatively weak across the board – even against the lowly kiwi after the RBNZ cut 50 bps yesterday. Is one of the greatest comebacks in G-10 history now behind us and where does AUD go next? Also – the USD is finally taking out resistance levels – can the move blossom further?

Aussie employment report
The Australian employment report for February was quite negative, though it was not necessarily a catastrophe as a massive drop in part-time employees actually hid a huge increase in full time employees (were some of these conversion from one type to another and how much of this is flood related?) Still, the overall number was negative and the previous month’s data point was also revised heavily lower (from +24k to +7.7k) so it all added up to a relatively dismal report. With the participation rate dropping two tenths of a percent, the unemployment rate managed to remain unchanged at 5.0% for February. With three poor employment reports in a row now, the theme of weakness in the Australian economy outside of the mining sector is deepening. And with commodity prices coming off here (copper prices posted their lowest level for the year yesterday), there is not much to recommend the currency at the moment unless the winds change abruptly. The great Aussie rally may finally be set to crumble further in the months ahead.

Chart: AUDUSD
The Aussie topped out against the rest of the G-10 currencies at the end of last year. Since then, it has been trading sideways. In the case of AUDUSD, this has also been the case. Now, parity is within reach once again and a key rising trendline has been taken out intraday. The next steps are a close below the psychologically important parity level and then the big 0.9800 area support on the way, perhaps, to a test of the 200-day moving average (currently 0.9525)

Odds and ends
The RBNZ cut 50 bps as we suggested was a higher odds outcome than the market expected. This only saw NZD briefly weaker, however, and the idea that the currency’s weakness against the Aussie proved the correct one for the moment after the weak Australia employment report. AUDNZD may falter further or not until a bit later this month, but it looks to be in nosebleed territory above 1.3500.

The Chinese trade deficit got a lot of attention overnight as it fell well short of the small surplus expected, but there is a seasonal dip every February and this number actually almost exactly matches the number from last February, so we would need to see a few more months’ data to get a firmer idea of the terms of trade trajectory. Certainly, with the huge rally in commodity prices, we might expect smaller surpluses for the next month or two at minimum.

The Bank of England didn’t move on rates as expected, and the market is beginning to move its expectations for the first rate increase from the bank to the early summer period. GBPUSD fell sharply after the meeting, but this was more due to USD strength. In other crosses, the pound held its own, however.

NOK is very weak today after a much lower than expected CPI figure and due to the fall in oil prices today. EURNOK is looking interesting technically and USDNOK has positively soared on the day.

Canada’s trade numbers suddenly soured relative to expectations. December’s blowout increase was reduced sharply from 3B to 1.7B and the January data point came in at a meager +0.1B vs. expectations of +2.6B. This saw USDCAD bouncing smartly on the day after yesterday’s new low for the cycle. Interesting reversal there.

The US weekly jobless claims number is a real downer, coming as it does after the steep (illusory) drop in the unemployment rate last month. The search for consistently good leading employment numbers continues. The US Trade Balance number was also a stinker, in that it spoiled the trend of improving terms of trade we were seeing previously. The market doesn’t seem to be focusing much on this number, however.

Looking ahead
The last of the three US treasury auction is up later today, with expectations for a relatively solid auction after yesterday’s very positive result for the 10-year. The 30-year offers another 100 bps or so of yield, but will foreign buyers shy away from the duration of these bonds?

The USD move here is getting significant. We’ve taken out the first key support in EURUSD, the first tactical AUDUSD support is now also gone, and the trendline there is also broken. USDCAD was unable to maintain new lows and GBPUSD has broken out of its messy channel to the downside. It looks like the short term pressure could continue here for bigger tests ahead. In any case, the green light is flashing for the greenback at the moment with risk coming off a bit and crude oil lower. Imagine what 10 dollar downside in crude and 4-5% in equities might do for the currency.

First up on the economic calendar today we have the Bloomberg Consumer Comfort survey (formerly the weekly ABC survey). Later we have a series of throw-away Chinese numbers (we can’t even find an update of their electricity production for the last couple of months, one of our key reality check gauges of what is really going on in the Chinese economy. Is there something to hide?). Then tomorrow, we have UK PPI data, the Canada employment report (last week saw insane payrolls growth, so we would lean toward mean reversion) and US Advance Retail Sales and the preliminary University of Michigan confidence data for March. On that last data point, other weekly surveys out there from Gallup are apparently showing sharply eroding confidence – probably on gasoline prices surging, so we might expect an ugly number there. 

Volatility is finally expanding here, folks, and in this environment, it could feed on itself, so stay careful out there.

Economic Data Highlights

• New Zealand RBNZ cut rates 50 bps to 2.50% vs. consensus of -25 bps
• New Zealand Feb. Card Spending fell -0.2% MoM
• Japan Feb. Domestic CGPI rose +0.2% MoM and +1.7% YoY vs. +0.4%/+1.9% expected, respectively and vs. +1.6% YoY in Jan.
• Australia Feb. Employment Change fell -10.1k vs. +10k expected and +7.7k
• Australia Feb. Unemployment Rate out unchanged at 5.0% as expected
• Japan Feb. Machine Tool Orders out at +73.7% YoY vs. +89.8% in Jan.
• Germany Jan. Trade Balance out at +10.1B vs. +13.0B expected and vs. +12.2B in Dec.
• Sweden Feb. Headline CPI out at +0.6% MoM and +2.5% YoY vs. +0.5%/+1.4% expected, respectively and vs. +2.5% YoY in Jan.
• Sweden Feb. Core CPI out at +0.5% MoM and +1.3% YoY as expected and vs. +!.4% YoY in Jan.
• Norway Feb. CPI out at +0.4% MoM and +1.2% YoY vs. +0.6%/+1.5% expected, respectively and vs. +2.0% YoY in Jan.
• Norway Feb. Underlying CPI out at +0.8% MoM and +0.8% YoY vs. +0.9%/+0.9% expected, respectively and vs. +0.7% YoY in Jan.
• UK Jan. Industrial Production out at +0.5% MoM and +4.4% YoY vs. +0.4%/+4.2% expected, respectively and vs. +3.7% YoY in Dec.
• UK Jan. Manufacturing Production out at +1.0% MoM and +6.8% YoY vs. +0.6%/+6.3% expected, respectively and vs. +4.5% YoY in Dec.
• UK BoE left Interest Rate and Asset Purchase Target unchanged at 0.50% and 200B as expected
• Canada Jan. International Merchandise Trade Balance out at +0.1B vs. +2.6B expected
• US Weekly Jobless Claims out at 397k vs. 376k expected and 371k last week
• US Weekly Continuing Claims out at 3771k vs. 3750k expected and 3791k last week
• US Jan. Trade Balance out at -46.3B vs. -41.5B expected and -40.3B in Dec.

Upcoming Economic Calendar Highlights (all times GMT)

• UK Feb. NIESR GDP Estimate (1500)
• Sweden Riksbank’s Ingves to Speak (2300)
• China Feb. Producer Price Index (0200)
• China Feb. Industrial Production (0200)
• China Feb. Consumer Price Index (0200)
• China Feb. Retail Sales (0200)
• New Zealand Mar. Non-resident Bond Holdings (0200)