Market Drivers Mar. 2, 2016

AU GDP Blows past estimates
UK PMI Construction weaker
Nikkei 4.11% Dax 0.12%
Oil $33/bbl
Gold $1231/oz

Europe and Asia:
AUD GDP 3.0% vs. 2.5%
GBP UK PMI Construction 54.2 vs. 55.5

North America:
USD ADP 8:15

It’s been another quiet rangebound night of trade in the FX market with the exception of USD/JPY which continued to climb higher in the wake of yesterday’s stronger than expected ISM data and overnight rally in the Nikkei which was up by 4%. USD/JPY steadily climbed toward the 114.50 mark but stopped just short of there as traders awaited the key ADP labor figures as the start of North American trade.

Meanwhile the big surprise of the night came from Australia where the GDP data printed much better than expected allaying fears that the slowdown in China would wreak havoc with the economy Down Under. The AU GDP printed at 3.0% versus 2.5% eyed on a year over year basis and 0.6% versus 0.3% on a month over month basis. The growth was driven by consumer and government spending which is acting as an offset to decline in capital spending due to contraction in the mining sector.

Over the past six month the annualized growth of AU GDP stands at 3.4% which is one of the best rates in the G-20 universe and goes a long way towards explaining the relatively sanguine view of the RBA. Yesterday the central bank in its monthly communique seemed nonplussed by the risks emanating from the slowdown in China and left the impression that AU short term rates are likely to remain unchanged for the foreseeable future.

Given the move to negative rates in two out of the three G-3 central banks, Aussie’s 2% yield looks extraordinarily attractive to carry traders looking for any edge they can get. The Aussie therefore has remained well bid under the .7000 level and today’s news propelled it through the 7200 figure. We continue to doubt the rosy scenario as the full impact of slowdown in mining is just starting to be felt in the labor numbers and will no doubt filter down to spending as the year progresses, but for now the sentiment has certainly brightened for Aussie and the pair could make a run towards the 7300 figure over the next few days.

In North America the focus will turn to the ADP numbers which are forecast to come in slightly less than the 205K last month, but as long as the number is 175K or more it will likely prove positive for risk and could lift USD/JPY through the 114.50 level as the day proceeds.

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