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Aussie Leads, Cable Lags as High Beta FX Goes Separate Ways

Last updated 9/9/2010 5:39 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Australian employment beats Aussie hits 3 month high
• UK Trade Balance misses badly at -8.7B vs. -7.5B eyed
• Nikkei rallies .82% Europe flat at open
• Oil up to $74.85/bbl
• Gold quiet at $1256/oz.

Overnight Eco

• AUD Employment Change 30.9K vs.27.7K
• AUD Unemployment Rate 5.1% vs. 5.2%
• BSI Manufacturing Index 13.3 vs. 6.3
• JPY Prelim Machine Tool Orders y/y 170% vs. 1.44.9%
• JPY Household Confidence 42.4 vs. 43.6
• EUR French Final Non-Farm Payrolls q/q 0.1 vs. 0.2
• EUR German Final CPI m/m 0.0% as expected
• GBP Asset Purchase Facility n/a
• GBP Official Bank Rate n/a
• GBP Trade Balance -8.7B vs. -7.5B

Event Risk on Tap

• CAD Housing Starts expected at 185K
• CAD Trade Balance expected at -0.8B
• CAD NHPI m/m expected at 0.1%
• USD Trade Balance expected at -47.6B
• USD Unemployment Claims expected at 470K

Price Action

• USD/JPY holds steady at 83.75 as market awaits political resolution
• AUD/USD rallies to 3 month high after employment data beats .9250 last
• GBP/USD lags the rest of the majors after TB misses as 1.5400 holds the sell off
• EUR/USD risk rally sends it above 1.2700 in quiet trade

A very fractured night in the currency market as high beta currencies followed their own individual paths with Aussie outperforming the pack by a wide margin while cable brought up the rear in the wake of weaker than expected UK trade figures. Australian employment expanded for sixth consecutive month rising to 30.7K versus 27.7K eyed as the economy Down Under showed no signs of slowing.  The unemployment rate declined to 5.1% - its lowest reading in 18 months- while the underlying data registered an impressive gain of 53.1K in full time jobs versus -9.6K fall the month prior.

As we noted earlier, “Today’s strong employment data highlights the strength of the Australian economy which stands in sharp contrast to the rest of the G-20 universe where growth is sluggish at best. The continued expansion of the Australian labor market is likely to put upward pressure on wages   which in turn could force RBA to tighten monetary policy further if Q3 CPI prints above trend.   In last night’s statement Australian monetary authorities remained neutral in their assessment of risks, but given today’s better than forecast labor market results the RBA bias will now become more hawkish into the year end.”

The Aussie rose steadily in the aftermath of the news hitting a fresh 3 month high of .9360 in early morning European trade. The pair now faces strong resistance at the .9300-9400 level which has capped rallies for the past year and a half, but given the surprisingly persistent strength of the Australian economy, the Aussie may challenge those barriers once again over the next few days especially if risk aversion fears begin to ease and the threat of a double dip recession in the US recedes from the horizon. The pair remains the best currency market proxy for the global recovery trade and today’s strong labor data results only confirms the bullish view that RBA is not yet finished with its tightening cycle. 

Meanwhile in UK the Trade Balance data printed much worse than forecast with the deficit expanding to -8.7B versus -7.5B expected. The UK trade goods deficit rose to its widest level on record as demand for petroleum and chemicals increased imports while exports rose only marginally. Cable dropped to a low of 1.5380 in the aftermath of the release but stabilized ahead of the BOE announcement due later today at 11GMT. The market expects no change from the MPC both on the interest rate and the QE front so reaction to the news may be minimal, but given the recent spate of weakness in UK microeconomic data any expectations of near term tightening from the BOE  have now disappeared and cable could struggle in the near term.

In North America today the calendar is relatively quiet with only US Trade Balance and weekly jobless claims on the docket. Consensus calls are for a slight improvement in the trade deficit to -47.4B vs. -49.9B the period prior. However, the jobless claims may be the more important number for setting the tone of opening trade. Since peaking at 500K three weeks ago, jobless claims have gradually declined signaling that labor market conditions may be slowly improving. If the data beats expectations, coming anywhere close to the 450K level, risk flows should accelerate helping to sustain the rally in Aussie which could challenge the .9300 level by the end of the day if price action in equities proves supportive.   

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.