When I first looked at the price action last night and saw the Australian dollar down 2 cents since yesterday afternoon, I thought okay, here we go – some fat finger error, 'leaked’ central bank communication out of Wayne Swan’s office, or just something dodge. But it soon became clear that the price action wasn’t a dollar story at all. The euro was down 150 basis points, the British pound was down more than 130 basis points and the Japanese yen shot up from about 98 to 100.
This was more a US dollar rebound story.
Pressure had been building through most of the session. For instance, the Australian dollar had lost 70 pips by about 0345 AEST. At that point, and in the ensuing one hour and fifteen minutes, the unit dropped 130 pips or so. It was the same with the other currencies, falling off a cliff at around 0400 AEST. As I write, the Aussie dollar sits at 1.0092, the euro is at 1.3044 and the British pound is at 1.5452.
Now, there were good reasons to buy the US dollar last night. On the heels of a surge in US jobs growth, new jobless claims were confirmed around the 325,000 mark for the second consecutive week. The four week moving average, which is often used to smooth out variations and volatility, is at 336,000 – the lowest since November 2007. This obviously bodes well for the labour market and is a good sign of things to come. But then again, this report came out hours before the bulk of the US dollar move.
More to the point, other countries had positive data out as well. In the UK, industrial production surged 0.7 per cent in March after a 0.9 per cent rebound the month prior. And of course we’ve seen strong German data. So I’m not sure it was the jobs report as some news wires suggest.
There is something here, although as yet I haven see what it is – massive hedge fund positioning, official action, it could be anything really, and the fact that we’re in a global currency war makes things difficult. The German finance minister noted only last night the distortions created by excessive monetary stimulus around the world.
So those currency moves were main event overnight, though the strong US dollar also hit commodities, which were all weaker – gold was down $18 to $1455, crude fell 0.8 per cent to $95.83 and copper was off 1.2 per cent. This in turn hit US stocks with energy and basic material stocks all weaker, although the key underperformers were tech, telecoms and financials. At the close the S&P500 was then 0.4 per cent lower (1626) with the Dow off 22 points (15,082) and the Nasdaq 0.1 per cent weaker (3409).
Bits and pieces otherwise – Philly Fed President Charles Plosser said that inflation hadn’t fallen enough to justify more stimulus and that he wasn’t worried buy inflation falling. US bond yields then rose a bit, with the 10-year at 1.81 per cent, the 5-year at 0.75 per cent and the 2-year at 0.23 per cent. Not much else really.
On to things more domestic, how good were the Aussie jobs gains yesterday? They were fantastic, and in this unreasonable environment of extreme pessimism, a much needed wake up call.
The April gain of 50,000 was the second strong gain we’ve seen over the last few months and as such brings the average number of jobs created over this year to something like 30,000 per month – which is double the historical average and more than three times the rate of job creation that we saw last year. As for the unemployment rate, it slipped to 5.5 per cent, and that was with a 0.2 per cent increase in participation. That is, if the participation rate had held steady this month, the unemployment rate would be 5.3 per cent.
You can safely say that anyone who continues to talk down the numbers with the usual 'I just don’t believe it' is an embittered bear who simply can’t be happy that the economy is doing well. It is humiliating for a lot of economists for sure, I appreciate that, and they have consistently been wrong on the economy for many years. But to come to their conclusions you have to disbelieve a lot of tier one data.
Despite the strong jobs surge and the clear acceleration in global growth data, the Reserve Bank is still on for further rate cuts. As I have highlighted all throughout this easing cycle, the unemployment rate has been steady and growth at trend – and yet we’ve still seen 200 basis points worth of cuts.
Why? Well, recall that the press release on Tuesday made it more explicit that the Australian dollar was the new policy target. Given that the currency is the new target, this implies the government has a greater influence on monetary policy deliberations than is usually the case. A problem, given that we also have an election this year and lower rates are normally seen as being politically advantageous.
At the very least, the constant debate over policy and growth weakness here has allowed the government to abandon its surplus pledge and avoid any critique of its profligate spending. Certainly we are seeing that in the US and UK as well, and the prime minister, in what would have been unusual in the past, came out just before the numbers to signal that rates would indeed head lower from here due to the elevated exchange rate. I’d note that the government's key spin people are calling for lower rates as well.
It’s about timing now, and while political decisions on the currency are random, I suspect the Reserve will sit pat in June as it would be simply be too brazen if they did cut. They have to at least maintain the façade that inflation (at mid-point now) and the economy more broadly is the goal here, so you’ll note the focus now on global growth concerns. They have cut before though in the face of strong data, so you can’t completely rule it out.
So then looking at the day ahead, we get the Reserve Bank's Statement on Monetary Policy today at 1130 AEST. This is less useful as a guide to policy given the currency is the target now, but it will be interesting to see the bank's forecasts. Depending on whether this document will be used to justify cuts or not, we should be seeing an upgrade to growth and inflation forecasts. Unlikely though, given the government and Reserve Bank's easing bias.
Looking abroad we get trade data out of Japan, Germany and the UK throughout the day and night, and then over in the US we get a speech from Ben Bernanke.
Have a great day…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.