Aussie Leads, Euro Lags – Carry Back?

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Market Drivers for March 14, 2013
Australian employment blows past consensus, but questions regarding its accuracy
Bank of Italy tells banks that showed losses in 2012 to not pay dividend
Europe 0.92% Nikkei 1.16%
Oil $92.65/bbl
Gold $1585/oz

Europe and Asia:
AUD Consumer Inflation Expectation 2.3%
AUD Employment Change 71.5K vs. 9.5K
AUD Unemployment Change 5.4% vs. 5.5%
AUD Full Time Employment Change 17.5K
JPY Industrial Production 0.3% vs. 1.0%
CHF Swiss National Bank Rate Decision unch.

North America:
USD PPI 6:30
USD Initial Jobless Claims 6:30

The Aussie was the star performer in overnight Asian and early European trade after the employment report revealed a mind boggling number of 71K new jobs versus 10K expected, but there were questions regarding its accuracy and the pair traded off its highs by midmorning European dealing.

The Australian labor data was truly astounding as the economy created the largest amount jobs in more than a decade, the unemployment rate declined to 5.3% from 5.4% eyed and the labor participation rate rose a whopping 0.3% from 65% to 65.3%. To fully appreciate the magnitude of the report, Australia’s increase in labor demand was equivalent to the US economy creating one million jobs in a month.

Fully 80% of the gains came from Victoria and New South Wales – the service centers of the country – while the mining regions of Queensland and Western Australia generated no jobs. This data point confirms the thesis that the mining sector which was the primary driver of growth in the Australian economy is slowing markedly. It also raises the question as to the accuracy of the data given such a massive upside surprise and such uneven distribution of job growth. Indeed an RBA official suggested that there may have been a statistical error in this months calculations, but no further explanation has been given yet.

Regardless of the final adjustments in the labor data, today’ report makes clear that the Australian economy remains resilient and is unlikely to require any further monetary easing for the foreseeable future. Indeed the curve is only pricing in 6 bps of easing for the rest of the year. If the RBA does indeed remain on the sidelines keeping rates steady at 3% then the Aussie may regain its stature as the preeminent carry trade in the G-10 universe. That is likely to push AUD/JPY through the key 100.00 barrier in the coming days.

Meanwhile in Europe the EUR/USD treaded water in a tight 1.2980-1.2950 range and slipped lower as dealing progressed on news that the bank of Italy asked those banks who reported a loss on their Tier 1 capital to not pay out dividends this year. In addition Spain went to market with some very long term issuance and was able to obtain better yields at 5.445% versus 5.928% the period prior, but only sold 800M of 1-2 Billion planned indicating that investors remain wary of assuming too much long term credit risk in the periphery.

The pair continues to trade with a downward bias as news out of the EZ remains bleak and yesterday’s break of the key 1.2950 level suggests that shorts may want to test the 1.2900 figure as the day proceeds.

Boris Schlossberg
Managing Director

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