Weak Australian Labor Data Weighs on Risk

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Market Drivers July 12th, 2012
Australian employment misses badly signaling more RBA cuts
EZ Manufacturing rebounds in May
Nikkei -1.48% Europe -0.63%
Oil $85/bbl
Gold $1567/oz.

Europe and Asia:
AUD Consumer Inflation Expectation 3.3% vs.2.3%
AUD Employment Change -27.0K vs. 0.2K eyed
AUD Employment Rate 5.2% vs. 5.2%
JPY BOJ Bank Rate Decision
NZD Business NZ PMI 50.2 vs. 55.8
EUR ECB Published July Monthly Report
EUR Eurozone Industrial Production 0.6% vs. 0.2%

North America:
USD Initial Jobless Claims 8:30
USD Monthly Budget Statement 14:00
CAD New Housing Price Index 8:30

Risk FX was pummeled in Asian and early European trade with Australian dollar suffering the most in the wake of much weaker than expected employment report that raised the odds of yet another RBA rate hike at its next monetary policy meeting in August. Australian employment printed much worse than expected declining by -27K versus 0K eyed as labor demand contracted for the first time in four months.

The decline in labor was even worse than it appeared as the Australian economy lost -33.5K full time jobs while gaining only 6K part time jobs. The labor participation rate declined to 65.2% form 65.5% the month prior while the unemployment rate ticked up to 5.2% from 5.1% the month before. The weak employment result signals that economic activity in Asia Pacific region is clearly slowing and almost assures another 25bp rate cut by the RBA at next month’s monetary policy meeting. Ahead of the report swap markets had priced in the possibility of a rate cut at 74% and those odds are likely to have increased markedly in the aftermath of the disappointing data.

The disappointing labor data numbers will likely put sustained downward pressure on Aussie for the rest of the week especially if tonight’s Chinese economic releases which include GDP, Industrial Production and Retail Sales all miss their mark. The Aussie has been a big beneficiary of speculative flows as investors have rotated out of the euro sending EUR/AUD below the key 1.2000 in yesterday trade. However, those flows were quickly reversed in the aftermath of today’s data and EUR/AUD may continue to gain ground as the short squeeze traps the late bears.

Euro saw little action in tonight’s session holding above the 1.2200 level for the time being. Investor sentiment towards the single currency remains highly negative, but may be reaching a point of short term exhaustion. Tonight’s better than expected Industrial Production numbers which printed at -0.6% versus 0.0% and a solid 12 month Italian auction which saw bills prices at 2.69% versus 3.97% the period prior, could lend a modicum of support to the beleaguered unit.

In North American trade the focus in the AM will center on weekly jobless claims with markets looking a match of last week’s 376K print. If the data surprises to the upside it could provide a modest lift to risk early on, but trading is likely to be lackluster as both equity and currency markets will await the Chinese data later tonight. If China’s economy confirms the bearish thesis that it is slowing significantly risk assets will come under further selling pressure with EUR/USD giving up the 1.2200 handle while Aussie returns towards parity.

Boris Schlossberg
Managing Director

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