Welcome to the NFP dollar contained trading range. Despite it being a week laden with central bank decisions, the main event still remains Friday's US jobs report. Was last month's weather write-off feasible and justified? Investors seem relatively calm for this week's report, even though it’s a biggie; however, expect many to still be influenced somewhat by this week's ADP report on Wednesday. Historically, there is no strong correlation between the two, but directionally investors believe they can be convinced.
They current inter-market play between the various asset classes is the result of many individuals trying to rebalance their own portfolios. Today's emerging market worries are not just about the Fed’s modest tapering plans. Investors are also concerned as to whether China can deleverage its financial sector, and on the timing of Fed’s first-rate hike. In the EM space, currencies with large current account deficits and low forex reserves remain the most vulnerable, like the Turkish lira (TRY) and South African Rand (ZAR). Any uncertainty and the market will continue to gravitate towards JPY, CHF and sometimes the USD for safer keeping.
The AUD had been confined to a long-term downtrend, reflected by its recent three-and-a-half year low (0.8658). But the techies would suggest that an Aussie currency bounce has been long overdue. With a little help from the RBA that is exactly what has happened in the overnight session. For a long time Governor Stevens and his fellow policy makers have been on an easing bias, while bemoaning the fact that their own currency was too strong. The AUD lost -14% against the dollar and -21% against the EUR last year. However, the tide may be changing and the AUD seems to have been cut loose by its own central bank to rally.
The USD is coming off some intraday highs in Asia following the sharp rally of the AUD outright to the USD after the RBA changed tack from their previous "easing" bias towards a more neutral stance on interest rates. The RBA policy statement marks an abrupt shift away from an open-ended dovish bias after the most recent rise in Q4 CPI. Governor Stevens and company now see that their monetary policy is "appropriately configured" and a most prudent course being "a period of stability" in interest rates. More importantly, Aussie policy makers have dropped the language referring to the AUD as "uncomfortably high", sending the currency sharply higher across the board. With their actions, the RBA has "clearly moved towards a more neutral stance of monetary policy and is now putting the burden on data over the next few months whether policy makers will be required to ease policy any further.
Perception is one thing, but strong economic evidence is everything. UK data overall remains relatively strong, proof that the UK economy is enjoying its strongest growth period in five years. This morning's construction PMI print came in at 64.6, much stronger than the anticipated 61.5 and well above last month's 62.1. It's the highest January reading in seven years and reveals a strong to the New Year for construction sentiment. This is just more proof why investors are betting that Governor Carney at the BoE will be the first to lead the developed countries away from a low rate (+0.5%) environment. No decision change is expected at this Thursday's BoE meet, but Carney and a strong UK economy are expected to be the pivot from fighting "stagflation to managing economic expansion." Money market dealers are already pricing in a BoE rate lift from +0.5% before this year is out, while the same dealers have the US hiking in early 2015. Whatever tightening occurs will be gradual. The risk for Carney being the first to rise is that the divergence will push up the UK’s pound and bond yields, threatening to choke off the economy's economic upswing. Global policy makers are swimming in unfamiliar waters. This is a first and any decision policy change will be well calculated and meticulously slow to be implemented – no false starts will survive.
Prices of goods leaving the eurozone factories rose for the first time in three months in December (+0.2%). Will this ease the market fear that too little inflation, rather than too much, could threaten the already fragile eurozone? Last week's CPI print for January (+0.7%, y/y) had many hitting the EUR sale button, front running an expected dovish ECB. Prolonged periods o flow inflation makes it more difficult for the eurozone and company to tackle their "economic imbalances and reduce their large debt loads." Despite the price of goods rising, the rise is not significant enough to suggest that inflationary pressures are building within the system. Factory prices do not automatically equate to higher consumer paid prices. High eurozone unemployment coupled with low wage rises does not mean that produces are able to successfully pass on any price increases. For now the single currency remains contained in its near bear currency range – negative momentum was incapable of pushing it lower yesterday. Now it's sit and wait while the market questions the "true" strength of the US economy. The USD has managed to retreat from its two-month highs against the G7 pairs on committed growth concerns.