- Today’s NFP should provide potential indication of the position of the US in its growth cycle
- RBA statement indicates that the central bank is ready to further ease
- We believe that the RBA will cut 50bp between June and August
- We remain bearish on AUD in light of further downside risks
- We believe that the US economy and its job market are overestimated as retail sales are declining
- A lower than expected NFP today will definitely close the book on a second rate hike as the Fed will not take any risks that could increase deflation
- EURUSD should continue to go higher to 1.2000 over the medium term
Risk appetite disappeared in the Asian session ahead of the critical US payroll report. Today's read should provide potential indication for the position of the US in its growth cycle. Asian regional equity markets were weaker as the Shanghai composite and Hang Seng index fell -1.94% and -1.31%. ASX was in the green, rising 0.23% as the RBA statement of monetary policy signalled that the bank is likely to ease next month. USD was broadly strong against G10 and commodity linked currencies. EURUSD traded in a choppy tight range between 1.1390 and 1.1410 with no directional indication. As news of the RBA report hit the wires AUDUSD collapsed from 0.7470 to 0.7385. With markets only pricing in a 10% probability of a Fed rate hike in June current downside in USD feels stretched. In Japan, April Services Sector PMI dropped to 48.9, the weakest read in two years from 49.9 in March. Plenty of chatter from Fed members provided entertainment for traders. Fed’s Kaplan suggested that the Fed was still struggling to understand how close the US was to full unemployment. Fed’s Lockhart said it is not realistic to shift from the current 2% inflation target, while Fed’s William commented that he is optimistic about their 2% inflation goal. And finally, Fed’s Bullard steered clear of comment direction regarding monetary policy, instead stating that last year’s “taper tantrum” induced volatility was due to ineffective monetary policy. All solid headlines, but nothing in terms of new insight or market moving.
Yann Quelenn, market analyst: The Change in Nonfarm Payrolls is expected to come in today at 200k new jobs, despite being lower than the March prior data, +215k. Labour market conditions are still improving when we couple this information with the low unemployment rate. The current job market momentum seems to be quite strong, but our research leads us to believe that the health of the U.S economy, and especially of its job market, is overestimated.
Recent data is much more on the soft side as retail sales growth declines month after month. It sounds contradictory to us that job market conditions should improve while consumption hardly increases. A lower-than-expected NFP today will put a definitive end to the possibility of the Fed hiking for the second time since December 2015. Markets seem resigned to the possibility of a June hike as the probability of any tightening is not higher than 10%.
The US needs inflation, at the very least to kill its massive debt ($18 trillion), however, the Fed will not make any moves that could increase deflationary risks. This is also why we will need to closely monitor wage growth which seems to have nonetheless picked up slightly since the start of the year. In our view, this is not a significant indicators as there are still too many workers on the sidelines waiting for work as the average weekly hours per employee is still around 35 hours. We interpret this as meaning that many US employees have part-time jobs. Currency-wise, the EURUSD should continue to go higher towards 1.2000 over the medium-term.” ---
The RBA’s Statement of Monetary Policy indicates that the bank was prepared to ease policy further. The RBA has revised its inflation forecasts lower by 1pp for the end of 2016. This means that inflation will scrape near the bottom of the RBA 2-3% target band. Our view is that June and August will be both live meetings for the potential of 50bp being removed from the already historically low cash rate 1.75% by summer’s end. We remain bearish on the AUD in light of further downside risk to interest rates and would materialise our view through a short AUDJPY trade (targeting 77.59 reaction low).
In the European session, traders will be watching Spanish industrial production figures, German construction PMI and Poland central bank rate discussions. However the main event will undoubtedly be the US payroll report. FX volatility is likely to remain subdued until the critical release. Payroll growth is expected to decelerate to 200k consensus from 215k prior read, however given the ADP and ISM labor complaint we anticipate noteworthy downside risks. We forecast a number closer to 180k, which should keep the overly short USD position safe. However, an upside surprise in NFP will have an asymmetrical response in USD as traders will quickly need to recalculate the probability of a rate hike in June. Falling participation rates should push the unemployment rate to 4.8%. We expect that the cyclical slowdown seen in incoming economic data, driven by weak international conditions, will begin to play into the strong US labor markets. While USD shorts are heavy we see no sustainable fundamental rationale for holding USD currently. When the smoke clears from today's payroll read we expect EURUSD bullish momentum will reengage heading back towards the 1.1616 resistance.