Article / 17 January 2013 at 11:09 GMT

AUD hit on employment report; JPY weakens anew

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank
Denmark

JPY sharply weaker as Amari retracts his comments while AUD was hit with an ugly employment report. Could AUD finally begin moving again, or does complacency remain?

FOMC and unintended consequences
Here’s an article that is almost too funny to read: “Fed Concerned About Overheated Markets Amid Record Bond Buying”. This is almost too ironic – or is it simply Orwellian? The “overheated markets” have been created by monetary petrol directly from the Fed, as Fed policies are confiscating savings with negative real interest rates and symbolically serving as a gun to the head of investors to take on as much risk as possible.

Regardless, there has to be a sense of unease growing at the Fed as it realizes that its policies are driving new risks in asset markets (which would theoretically require Fed action in the future to mop up after the mess – but what do you do when it is the mopping up that creates the mess?). This is part and parcel of what was coming across from the most recent FOMC minutes and is probably what Bernanke was referring to with his mention of “unintended consequences” at the last press conference. Junk bonds are at the centre of attention as they are in a wild bull market that has seen investors abandon all sense of caution. Everything looks good as yields fall and fall and fall, which lets even the iffiest companies refinance at ever cheaper levels. But once the credit begins drying up or the interest rates merely stop falling – let alone rise like they have been of late – a weaker economy will take its toll and an ugly default or two could quickly spike yields for the entire asset class. It’s a ticking time bomb for which the fuse length remains unknown.

JPY: Amari retracts
A contrite Economics minister Amari was out overnight retracting his comments as he no doubt got a verbal blistering behind the scenes for his recent comments (even though they merely stated the obvious). This has the JPY crosses on a rampage back higher, but I suspect we’ll continue to trade more or less within the recent range until after next week’s meeting (21-22nd). At this point, the market is already expecting a 2% target adoption and ESM bond buying, so it would look in the short term like the most classic of all sell the rumour, buy the fact setups if the JPY is near its weakest levels heading into the meeting, unless the BoJ goes “even more nuclear” than expected. That would seem low odds, as it may want to make a show of at least nominal independence before new leadership is appointed in the spring.

Aussie unemployment shock
The Australian employment report overnight was far weaker than expected, and the previous month’s unemployment rate was revised higher, with the December rate now rising another 0.1% above that level, such that instead of appearing that a new downtrend in unemployment is under way, we are suddenly very close to the highest unemployment rate since 2010 here at 5.4% and would have posted a worse unemployment rate than during the worse levels of 2009 if the participation rate had not fallen over the last few years. The Dec 2014 Aussie rate STIR jumped 7 ticks and the market sharply upped its prediction of further RBA easing. The question is whether anything can move non-Euro, non-Japanese Yen currencies any more. Of course the answer is eventually yet – but the lack of volatility in many corners of this market is truly astounding.

Chart: EURAUD
EURAUD showing a bit of a teacup technical formation, though the cup itself was a bit messy. Needless to say, the 1.2800-1.3000 zone is rather interesting if we look at the pair with a wide angle lens. AUD is clearly being held aloft by spectacular complacency, which could yet see a further melt-up in asset prices, but the asymmetric risk in the longer term is of downside once risk aversion returns.

euraud

Looking ahead
A few items left on the calendar to close this week: Today we have the US weekly jobless claims numbers and the latest US housing starts/building permits numbers (should be strong if the NAHB survey is to be believed, but new housing is artificially supported due to underwater mortgage holders in existing homes unable to move and therefore a low supply of existing housing also as banks are slow to release inventory to avoid dumping prices.) Up a bit later, we have the US Philly Fed.

In Asia, look out for the latest Chinese GDP, Industrial Production and Retail Sales numbers, which should be taken with the usual grain of salt. Many have pointed out that the latest Chinese export numbers do not add up (see, for example, this article).

Economic Data Highlights

  • New Zealand Jan. ANZ Consumer Confidence Index oaut at 118.3 vs. 114.7 in Dec.
  • Australia Dec. Employment Change out at -5.5k vs. +4.0k expected and +17.1k in Nov.
  • Australia Dec. Unemployment Rate out at 5.4% as expected and vs. 5.3% in Nov.
  • Japan Dec. Nationwide Department Store Sales out at -1.3% YoY vs. +2.2% in Nov.
  • Switzerland Dec. Producer and Import Prices out at +0.1% MoM and +1.0% YoY vs. +0.1%/+0.9% expected, respectively and vs. +1.2% YoY in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

  • US Dec. Housing Starts and Building Permits (1330)
  • US Weekly Initial Jobless Claims (1330)
  • US Weekly Bloomberg Consumer Comfort Survey (1445)
  • US Jan. Philadelphia Fed (1500)
  • US Fed’s Lockhart to Speak (1705)
  • New Zealand Q4 Consumer Prices (2145)
  • China Dec. Property Prices (0130)
  • China Q4 GDP (0200)
  • China Dec. Industrial Production (0200)
  • China Dec. Retail Sales (0200)
1y
goldfinger goldfinger
Do you know when China GDP is due John J?
1y
Father And Son Father And Son
Friday 02:00 GMT, GDP with Retail Sales.
1y
tony1 tony1
You think that will decide the fate of AUD$
1y
goldfinger goldfinger
Who knows! China's figures are what they are. GDP is a notoriously difficult number to report accurately in the short term. Why do we get three revisions over a quarter in the UK and USA, and can take up to five years to be completely accurate. How do you glean an accurate number from China and as that is the case, Why does the market move on it? Getting back to your question. Yes, because it dictates what may or may not be exported in nat resources from Australia. If it is of any interest, I was listening to an anylist talking about Brazil and I think that it is quite clear that their economy is softening. Interest rates are/should be reduced. Their main nat resource market must be China. S, I wouldn't believe everything I read...
1y
Rcernava Rcernava
My take on it is that Aussie is seeing some headwinds with or without China. Traders we're careful on getting too aggressive on the Aussie yesterday in case of any wild upside surprise on China GDP. We now see AUD sold off after GDP even through it was a better print. I think the inflation data will possibly lay a path for more easing from the RBA. Lets see.

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