Australian dollar smashed by tearaway US jobs

See the latest Australian dollar analysis here:

Macro Morning

After a week of going nowhere, forex lit it up last night as we approach tonight’s US jobs report. The big, smart, hot money piled into DXY and everything else got caned. EUR sank:

Australian dollar was crushed:

Gold was put to the sword. Oil survived it:

Base metals were smacked:

And big miners:

EM junk likes fewer things less than a strong DXY:

US yields firmed:

Tech didn’t like it but wider markets held on:

Westpc has the data wrap:

Event Wrap

U.S. ADP private sector payrolls rose 978k in May (vs 650k expected), although April was revised to 654k from 742k. Still, it’s the largest monthly increase since June, reflecting a robust recovery. The service sector added 850k jobs, and leisure/hospitality 440k.

The ISM services index rose to 64.0 in May -an all-time high. Most of the components improved, notably the orders backlog index, and prices paid which is now just shy of the record peak in 2005. Markit services and composite PMIs also rose in May to record highs. The services index rose to 70.4 in the final May reading (was 70.1 in the preliminary), with prices charged up to a record high. The composite index rose to 68.7 (68.1 flash) from 63.5 in April.

FOMC member Williams said now is not the time for the Fed to adjust its bond-buying program, although it makes sense to be talking about options for the future: “The economy has improved, and I think it’s on a good trajectory, but to my mind, we’re still quite a ways off from reaching the ‘substantial further progress’ that we’re really looking for, in terms of adjustments to our purchases…That said, we have to be thinking ahead, planning ahead, and so I do think it makes sense for us to be thinking through the various options that we may have in the future – talking about how the economy is doing, where we see it going, and understanding how that may play out over the coming months”.

Kaplan reiterated he would like to start taper talk sooner than later, saying the Fed is making progress on its goals sooner than expected and should start gently lifting its foot from the policy pedal. He does not believe the labour market is suffering from a lack of demand , rather it a skills matching issue, and supply constraints may be structural.

U.S. President Biden has proposed to Republicans the idea of a 15% minimum tax on U.S. corporations as a way to fund a bipartisan infrastructure package. This sets aside an earlier proposal to raise the corporate tax rate to 28% from 21%, which was unacceptable to Republicans.

Event Outlook

Australia: We expect April to show a 3.0% rise in housing finance approvals, with a further decline in construction-related finance associated with the Federal HomeBuilder scheme more than offset by an uplift in investor lending. The wider picture on established housing markets remains positive with both sales volumes and prices sustaining strong gains through April and May.

New Zealand: We’re forecasting a further 1% rise in building work put in place in the March quarter. That’s underpinned by an expected 2% rise in residential building work as the demand for new homes continues to surge. Non-residential building activity is expected to post another modest fall.

Euro Area: The market is looking for a 1.5% fall in April retail sales; strength will build as the economy continues to reopen.

US: We expect a strong rebound in nonfarm payrolls in May with follow through in coming months. The US is still more than 8 million jobs shy of the level seen prior to the pandemic, and the economy is opening quickly as the vaccine drive takes effect. To our 800k call for May (market median is 674k), there is arguably upside risk. This is also the case with respect to revisions to April. As more people come back to the labour market, the downtrend in the unemployment rate will slow. In May we only expect an incremental fall to 6.0%. Average hourly earnings should rise 0.3% in May, and remain choppy month to month for a while yet. April factory orders have been showing robust growth, but are constrained by transport orders (market f/c: -0.3%).  Fed Chair Powell will take part in the BIS panel on climate with the ECB’s Lagarde.

The US data flow was good but the primary trigger appears to have been a tearaway ADP jobs report, even though it is not a terribly useful lead on the BLS:

Private sector employment increased by 978,000 jobs from April to May according to the May ADP® National Employment ReportTM. Broadly distributed to the public each month, free of charge, the ADP National Employment Report is produced by the ADP Research Institute® in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.

Anything like that kind of number from the BLS will be enough to thaw out stagflation concerns given it suggests any labour supply bottlenecks are and will ease.

At the same time, it may also trigger a further lift in yields because the fear will return that the Fed will taper and tighten earlier than planned.

So, a higher BLS print will trigger more DXY strength and vice versa.

Opposites for the Australian dollar.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. MathiasMEMBER

    It begins.

    DXY up… EU down… AU down… Gold down… Silver down… and all the rest.

    China talking Nukes.

    Trump throwing dollar figures around… China ‘pay us $10 trillion dollars for damages’.
    https://www.news.com.au/world/north-america/us-politics/donald-trump-demands-china-pay-10-trillion-for-its-handling-of-covid/news-story/f78d935e59a6222c9168c97bb4101bb1

    … and when I went out in my nickers to check the mailbox this morning, I actually had to put a shirt on. I was cold.

      • Silvio Gesell

        However isn’t this meant to be longer term investing not shorter term trading.

        • With respect, that’s a false binary, and I don’t think I nor DLS are trying to frame it as such.

          It’s just a large and definite move compared to normal daily moves.

          In a long-term sense, why can’t it just be part of a longer, larger trend (perhaps)?

          And, it’s fair to comment on both the short-term and longer-term significance, without the notion that they are somehow competing commentaries.

          • Well I think smashed is the wrong description
            It’s just going to be a standard move at this stage ……

            You’ll need to accept these moves will be normal

            Don’t worry you are going to see some serious smashing ahead ……..in many things

            Things are about to really hot up now

        • @BW & Silvio

          It’s where we are in the cycle
          The speculative stage

          In everything

          Housing currency commodities and sharemarkets

          These will be standard moves

          We are now at the point where human emotions have taken over from reality

          Fear Gread FOMO, wreckless decision making

          Sentiment and market positioning will be more ove an impact

          Forget about fundamental analysis and traditional valuation methodology

          Even technical analysis, you are going to see false breaks both sides

          Markets are going up over extend

          Think about psychological factors now

          This is the euphoric manic blow off bubble stage

          If you are a long term investor, make your mind up and don’t look at daily moves

        • I’m with Burbs. ST or LT, today could well be a seminal moment as the Elephant in the boat pushes off support on a data release. (& throws my pending short DXY view out the window). Friday night might confirm today’s move & Dave will be off to the races….. which would likely change my ST view.

          • Even if we have a strong jobs number DXY might still react up to 91s, nice counter trend rally
            I think the top will be around that 91 level for a big move down into the 80s and possibly very high 70s over the next 4 to 6 months

            Guess if we see that it changes everything, commodities up and AUD to 90c around, that could be what could push iron ore above $300
            Let’s see what happens from here
            We are definitely at an inflexion point

    • I just don’t understand how big of an impact these moves are to our economy?? I get the overall basis of having a lower $$ but these daily moves up/down who is benefiting/losing?

      • Mark
        You are going to start seeing daily swings even bigger, that move in the AUD or what ever will be standard
        Now over the 4 to 6 months
        If you are a long term investor don’t worry a 1c move in the AUD won’t be any stress, we might get a little more downside but could just swing straight back
        Don’t get caught up in the daily moves, volatility is going to start to rise in everything

        • Yeah makes sense mate, I am not in this trading daily/hourly, although friends of mine who took this up in the last year, have suddenly stopped talking about trading, but they read so many books they tell me lol

  2. @TA
    Re your Q

    I don’t actually bet at the casino or horses, doesn’t interest me
    I only bet (trade) in financial markets

    My friends do and constantly lose

    My because I feel like a know a little about financial markets, guess in the end it’s all the same

    • The Travelling Phantom

      No worries! I only asked caused you said you were heading to the casino 🙂
      dreary and wet in Vic, glad for you that you escaped!

  3. Luckily 2 days ago I moved all my cash from AU$ to US$ at only 3% exchange rate so now I saved whopping -1.7%
    Two or more days of smashing and I will break even.