Sterling has been blasted lower after BoE governor Carney cast doubt on a previously pretty-much-expected UK May rate hike. The EU's rejection of Britain's latest Brexit-Irish border plan only served to deepen the rot.
Article / 16 January 2014 at 7:56 GMT

AUDUSD swoons to new low on jobs report; GBPUSD eyes support

Head of FX Strategy / Saxo Bank

• AUDUSD and AUDNZD hammered to new lows
• MXN, TRY and ZAR all struggle against USD
• Beige Book reinforces taper expectations

By John J Hardy

Weak Australian jobs report
Australia saw a very weak jobs report for December overnight, with payrolls shrinking 22,600 outright and full time jobs shrinking 31,600, the worst reading in over two years (though this is a jumpy data series by all accounts). Much like the US, the falling participation rate Down Under meant that the unemployment rate stayed the same at 5.8 percent, though it would long ago have crossed to the higher level than in 2009 had the participation rate not dropped by 0.7 percent since then, with much of that drop coming in recent months suggesting that the market may be even weaker than it looks from the other data due to a sudden rise in discouraged workers. The weak data pushed AUDUSD and AUDNZD to new lows for the cycle. The latter is now below 1.0600 and closing in on multi-decade lows (the 2005 and record low was around 1.0430) and the below 1.0600 and momentum suggests that it might stretch to the lowest level ever, especially as long as risk appetite is on the bid, as this market loves its kiwi. Still, I am expecting the pair to bottom some time in this quarter and possibly rise as much as ten percent for the balance of the year.

EM currencies struggling
Emerging markets currencies continue to struggle, particularly MXN, TRY and ZAR, all of which scratched to new recent lows versus the US dollar. In the case of USDTRY a record high, USDZAR a post-financial crisis high (though its highest monthly close during the GFC was around 10.20 versus spikes to just below 12.00), and in USDMXN a local high since early December. The ongoing belief in the Fed taper is helping to drive the situation there, as well as the theme of a self-reinforcing USD appreciation aggravating the challenge of current or capital account imbalances in these countries and debt in the private sector demoniated in US dollars. TRY looks particularly vulnerable as the central bank appears somewhat politicised and has insisted it won’t raise rates (while in Brazil, for example, they have raised rates aggressively from 7.25 percent in early 2014 to 10.50 percent after the 50 basis points hike to defend the currency). An FT article today suggests that the central and eastern European currencies HUF and PLN as well as the Chilean Peso could also be vulnerable on this theme.

USD still resurgent
The greenback rally looks healthy, but still needs one more push to help make the bullish case more compelling. A move down through 1.6250 in GBPUSD, 1.3550 in EURUSD and 0.9140 in USDCHF would help seal the deal for the major USD/Europe pairs.

GBPUSD declined to key support yesterday and we had the best leading indicator on the housing market, the RICS house price balance, weakening overnight rather than showing the expected gain. I continue to look for a possible fall in cable, which becomes technically interesting if we traverse down through the 1.6250 zone. If the recent range holds, on the other hand, the pair still needs 1.6500-plus to reinvigorate any bullish arguments.

Source: Saxo Bank

Looking ahead
The ECB’s Weidmann is out speaking this morning — don’t be surprised if he says something absurdly tone deaf and hawkish that triggers a bout of euro volatility before the market decides that he is an outlier and not in the Mario Draghi camp.
The US Fed’s Beige Book was generally positive and the Fed’s Lockhart (non-voting this year) said he expected inflation to begin rising toward the target soon, though there will still downside risks. The positive message from the Beige Book underlines the likelihood that the Fed will taper another USD 10 billion at its meeting at the end of this month, as it will likely take more than one bad non-farm payrolls report to give the FOMC pause.

Today’s main data focus will be on the US CPI numbers and jobless claims. If the inflation numbers are exceptional outliers, this should have implications for the US dollar. The Philly Fed is up later and Ben Bernanke is also out speaking today on “the challenges facing central banks”. It’s doubtful that the speech will produce any market-moving rhetoric of note as it is not Bernanke’s place now to do anything but exit quietly as the spotlight is already on Janet Yellen.

Stay careful out there.

Economic Data Highlights

  • Japan Nov. Machine Orders rose 9.3 percent MoM and 16.6 percent YoY vs. expected gains of 1.1 percent/11.7 percent respectively and vs. 17.8 percent YoY in Oct.
  • Japan Dec. Domestic CGPI rose 0.3 percent MoM and 2.5 percent YoY vs. 0.3 percent/2.6 percent expected, respectively and vs. 2.6 percent YoY in Nov.
  • UK Dec. RICS House Price Balance out at up 56 percent vs. the 60 percent gain expected and 58 percent in Nov.
  • Australia Dec. Employment Change out at minus 22,600 versus an expected 10,000 gain and vs. a November gain of 15,400.
  • Australia Dec. Unemployment Rate out unchanged at 5.8 percent as expected

Upcoming Economic Calendar Highlights (all times GMT)

  • Eurozone ECB publishes monthly report (0900)
  • Eurozone Dec. CPI (revision) (1000)
  • Eurozone ECB’s Weidmann to speak (!000)
  • US Dec. CPI (1330)
  • US Weekly Initial Jobless Claims (1330)
  • US Fed’s Williams to present paper (1400)
  • US Weekly Bloomberg Consumer Comfort Survey (1445)
  • US Jan. Philadelphia Fed Business Outlook (1500)
  • US Jan. NAHB Housing Market Index (1500)
  • US Fed’s Bernanke out Speak (1610)
  • Switzerland SNB’s Jordan to Speak (1700)
  • Euro Zone ECB’s Reinesch to Speak (1700)
  • Japan Dec. Consumer Confidence Index (0500)
  • Japan Dec. Nationwide Department Store Sales (0530)




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