US payrolls escalate the odds

Last Friday US non-farm payrolls disappointed expectations as they were less than half of the expected 150,000 increase in jobs – actual figures come out at 69,000. The US unemployment rate rose to 8.2 per cent from the previous 8.1 per cent. These figures were maybe the cherry on the cake after a week full of worrisome figures from the US.

From the previous week US consumer confidence, annualised GDP, and Chicago PMI (amongst others) all slipped lower. The data reminded investors that the US was not immune to a slowing global economy.

As the data hit the wires the EUR/USD initially slipped to 11 month lows at 1.2288 but the euro soon took the lead rising to 1.2542 in last Tuesday’s European session and in the process garnering around two per cent, when seen against the US dollar. The buck weakened as the likeliness of a third round of QE from the Fed weighed on the US dollar.

We must remember that the prospect of more monetary easing more often than not is a short term drag on the currency in question, as money supply increases and yields become lower. This explains why the US dollar weakened after last Friday’s the payrolls data.

Overall we expect Forex markets to remain volatile as investors try to balance out; on one side risk aversion on the back of the subsiding economic growth (quitting risk for the safer haven); and on the other side the possibility of more easing from the Fed. Risk aversion favours support for the US dollar (amongst others) but the prospects of more QE, as previously mentioned, is US dollar-negative. In the end however we expect that heightened risk should tilt the balance in favour of the “safe havens” (if there are any left!) typically the US dollar and the Japanese yen.

As the outlook for economic growth remains hazy and increasingly unclear, investors are now asking themselves whether the German inspired austerity could be actually sabotaging growth and Francois Hollande’s drive for growth, just a few weeks ago, immediately comes to mind.

Last Tuesday a G7 conference call was expected to put the eurozone’s largest economy under pressure to do more to stimulate growth. Media reported that Spain, the eurozone’s fourth largest economy was the major concern. Yet however the G7 opted not to release any statement after the teleconference.

Within the eurozone Greece has lost the limelight, at least for now, as investors wait for the outcome of the Greek elections on June 17. Meanwhile the credit rating agency Standard and Poor’s has attributed a one-in-three chance of a Greek exit – but luckily enough added that the chances of other sovereigns following are “unlikely”.

Spain captures investors’ focus; with the issues revolving around its banking sector and the recapitalisation requirements. It was reported that Germany urged Spain to enter into an IMF programme – something which so far Spain has decline to do.

With regards to our outlook for the EUR/USD, as reiterated last week: “Given the weaker fundamental data out of the eurozone and the region’s austerity-growth Armageddon we would expect the bearish bias to remain predominant. In the coming weeks to the downside the currency pair may be eyeing 1.20/1.1876 while upward moves should not breech 1.29/1.30 – the upper line of the bearish channel.”

From the US, Federal Reserve chairman Ben Bernanke’s testimony to Congress on the US economic outlook due today will be eyed, as investors will be waiting for further direction.

Early into last Tuesday’s session the Reserve Bank of Australia cut its overnight cash rate by 25bp despite earlier forecasts for a 50bp cut – thus putting the rate down to an effective 3.5 per cent. The central bank cited the economic weakness in Europe and a more moderate Chinese growth as the main reasons. After the news was released, the AUD/USD traded up to 0.9803 boosted by short-covering before easing to 0.9710.

We expect the AUD/USD, trading 0.9740 at the time of writing, to find resistance in the region of 0.9862 - 1.0038 for the current week. To the downside the currency pair should find support at 0.9406 – 0.9546. On Tuesday as well the Bank of Canada chose to remain on hold at one per cent, as was expected. In a statement following the monetary policy decision, the central bank once again signalled that it may raise the key rate later, but softened its hawkish stance.

Upcoming FX key events:
Today: French Unemployment Rate, UK PMI Services & UK BoE Interest Rate Decision & Asset Purchases Target.
Tomorrow: UK PPI, Canadian Unemployment Rate & Net Change in Employment.

Technical key points:
EUR/USD is bearish, target 1.2000, key reversal point 1.3000.
EUR/GBP is bearish, target 0.78 key reversal point 0.81.
USD/JPY is bullish, target 85.00, key reversal point 78.00.
GBP/USD is neutral.
USD/CHF is bullish, target 0.9780, key reversal point 0.9370.
AUD/USD is bearish, target 0.9600, key reversal point 1.0150.
NZD/USD is bearish, target 0.7370, key reversal point 0.79.

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RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

Mr Muscat is a senior trader at RTFX Ltd.