By Chris Weston, Chief Market Strategist at IG Markets
The USD is unloved right now, but that could change somewhat if today’s US payrolls provide the market with some sort of clarity around the US economy. Expectations are low, with traders speculating that weather issues will continue to play into the print, while a number of the key lead indicators – such the employment sub-component of the services ISM and ADP payrolls – have been weak.
In the prior two payrolls reads we had strong lead indicators and lofty expectations (despite the weather) and both employment prints ended up being poor. Using this contrarian throwaway logic I am going to speculate that today’s payrolls report is going to be strong, with a guesstimate of 185,000 jobs. This would be getting into the top end of the economists’ range and over the consensus of 149,000.
Given how the USD has traded, despite comments from the likes of Fed heavyweight Bill Dudley that he sees the threshold for tapering as high, the market is positioned negatively; so we could see a good gain in the USD even for an in-line print.A strong number would be really positive, as it’s extremely tiring having to justify that weak US data is largely weather related, however you can also extend that into other geographies with seasonal factors affecting data in China, while extreme heat in Australia has also affected various data points, such as inflation. So a good number today and the S&P 500 should also lead European and Asian futures markets higher, as strategists of all asset class want clarity and a good number would help to a degree, especially with price action in US equities starting to look a little tired.
EUR and AUD looking strong
The two major talking points on the floors in Australia today have been around the strength in both the EUR and AUD. Both currencies look fairly strong right now, although EUR/AUD has broken the March downtrend (on the hourly chart) and could see 1.5300 in the coming days. Going against market speculation, the ECB didn’t alter policy, which caused EUR/USD to break out of the downtrend drawn from the 2008 high. With new forecasts that European inflation will reach a modest 1.5% in 2016 (some fifty basis points below its objective), it really feels like the ECB are holding their breath and hoping inflation creeps up. This is a central bank that will continue to hold a reactionary stance, however for now there is no chance of further easing. It’s worth remembering that a higher EUR/USD will only act as a further headwind on inflation, but when the world is buying Spanish, Italian, even Greek debt in size, while every strategist is overweight European stocks, it’s these capital inflows that are a fundamental driver in EUR appreciation.
AUD/USD has broken out and if I were going to be long any currency against the USD it would be AUD or GBP right now. AUD/USD has reacted to some good data of late and is now oscillating around the 91 handle, supported by elevated interest rate expectation, with the swaps market now pricing in eighteen basis points of hikes over the next twelve months. This is still less than what the market is pricing in from the Fed, with a rate hike by Q2 15 fully priced into the Fed funds future, however naturally the carry advantage for the AUD is sizeable. Glenn Stevens hit the nail on the head today by saying jawboning has a limited effect, however it still didn’t stop him saying that over 90 cents the AUD/USD is ‘higher than the RBA’s assessment’. These comments saw the pair fall to 0.9068, but we’ve seen good buyers come back into the AUD and you can make a clear argument that a move to 92c could be on the cards. As mentioned, if we see a strong payrolls today and we could see a fall in the pair; although buyers should support around 0.9030 (the 38.2% retracement of the March rally).
Looking for USD/JPY strength
Staying with the forex theme; while we’ve seen good flows towards Japanese equities, USD/JPY looks pretty interesting here as well. There is good supply and offers around 103.00, however a break of this level and the January downtrend then we should see the 105 highs come back into play. I think it’s time to get more constructive on the USD, but I’d do it selectively, so USD/JPY longs look good to me, especially with the MACD (on the daily chart) looking like it wants to break the zero level.
In the equity space the ASX 200 is once again testing the February of 5461 and the fact the index is so close to making a higher high in the face of the US payrolls is positive. We’ve also seen flat days in China and Hang Seng, which have also contributed towards the slight rise in US futures. In turn, our European market opening calls have seen modest buying activity through Asian trade, and there’s still a belief we can see markets higher from here, despite some indecision seen in the daily charts.
On the docket it’s all about US payrolls, however we also get Spanish house prices, German industrial production and French trade balance, while headlines around Crimea and the proposed 16 March referendum are never out of sight either. Canadian employment figures are also due and these can have the tendency to have sizeable beats/misses as well. It’s also worth bearing in mind that we get China trade balance figures on Saturday, with the market expecting a sizeable narrowing of the surplus, with imports and exports increasing 7.5% a piece.