Dollar Drops Despite Strong US Data

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Market Midday Drivers for March 14, 2013
US data strong, but dollar sells off
Australian employment blows past consensus, but questions regarding its accuracy
Dow 0.41% Europe 1.08% Nikkei 1.16%
Oil $92.79/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 0.2%
USD Initial Jobless Claims 332K

Despite continued evidence of improving economic conditions in the the US economy, the dollar fell against most of its counterparts for a variety of reasons in morning North American trade. US jobless claims dropped by another -10K to 332K – the lowest level in the past 12 months – providing yet another data point to suggest that the US recovery is picking up steam.
Yet the dollar, which over the past few weeks rallied in the wake of positive US data sold off today as other factors dominated trade.

USD/JPY which presumably should have been the prime beneficiary of stre lower to 96.17 as the morning wore. The currency market is clearly more concerned with the yen part of the pair as traders turn their focus to the confirmation hearings in the Japanese Parliament. Mr. Abe’s three nominees have all received approval in the lower house, but Mr. Iwata – the outspoken nominee for Deputy Governor – faces a serious challenge from the DPJ in the upper house.

As we wrote earlier, “Prime Minister Abe is close, but still does not have the necessary support to receive a confirmation from Japan’s Upper House, where DPJ made no bones about its opposition to his candidacy. A rejection of Mr. Iwata may not only be barrier to Mr. Abe’s plans for a more expansionary monetary policy but may also be viewed as a political failure and could put further downside pressure on USD/JPY.”

Meanwhile the Aussie continued to set fresh highs hitting 1.0392 in North American trade in the wake of much better than expected employment data which 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.

Lastly cable skyrocketed in North American dealing rising nearly 100 points as short covering through the 1.5000 barrier drove the pair higher. The rise in cable helped to lift the euro off its lows as the pair found bidders ahead of the 1.2900 barrier. The EUR/USD may continue to consolidate on these short covering flows, but if the EZ data next week once again proves disappointing then the downward pressure will resume and the pair is likely to give up the 1.2900 figure.

Boris Schlossberg
Managing Director

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