Australian Dollar Hits Fresh Yearly High as Jobs Data Boosts Rates Outlook

Key Overnight Developments

• New Zealand: Manufacturing Growth Slows, Retail Sales Disappoint
• Australian Dollar Hits Fresh Yearly High as Jobs Data Boosts Rates Outlook

Critical Levels



The Euro consolidated at slightly higher levels in overnight trading, oscillating in a narrow range around the 1.50 mark. The British Pound attempted an advance early in the session but bullish momentum faltered, with sterling trading down -0.1% ahead of the opening bell in London.

Asia Session Highlights



New Zealand’s Business NZ Performance of Manufacturing Index showed the industrial sector grew at a slower pace in October after expanding for the first time after last year’s economic crisis in the previous month. The Employment component led the overall index lower, sinking -4.9% to fall back below the 50 “boom-bust” level to hint that manufacturers are still wary about the durability of the economic rebound seen over recent months and are not prepared to boost hiring in earnest. New Zealand’s unemployment rate hit a 9-year high at 6.5% in the third quarter and the Reserve Bank of New Zealand expects it will continue to rise, averaging 7.1% in 2010.

Retail Sales figures also proved disappointing, growing 0.2% in September from the previous month. Economists were predicting a 0.4% figure ahead of the release. Sales declined -0.4% from a year before, shrinking at the slowest pace in a year to extend the shallow rebound that began in January after the central bank slashed interest rates to a record low and the government stepped in with a hefty dose of tax cuts and deficit spending to prop up the economy. Still, the reading falls well within the downtrend that has been in place since March 2007 and it will take at least another several months of upside momentum to confirm that retail spending is on a path to meaningful recovery.

Australia continued to show resilience as the economy added 24.5K jobs in October, soundly beating expectations for a -10K decline. Still, the Unemployment Rate ticked higher to 5.8% (as expected), matching the six-year high where the gauge topped out in June. Although most of the gain came from part-time positions, the surge in the headline figure was enough to send the Australian Dollar soaring after the release to hit a fresh yearly high as traders increasingly bet that the central bank will raise interest rates for the third consecutive month in December. Indeed, a Credit Suisse gauge of priced-in rate hike expectations now puts the probability that Glenn Stevens and company will tack on another 25 basis points to borrowing costs at 83%, whereas the figure stood at less than 60% just a week ago.

Euro Session: What to Expect



Euro Zone Industrial Production is expected to grow for the fifth consecutive month in September, showing the annual pace of contraction moderated to -14.1%, the lowest since December 2008. Output has mounted a shallow rebound since finding a bottom in April as close to $2 trillion in global fiscal stimulus boosted both domestic and foreign demand. The sustainability of the rebound in the absence of government support remains highly suspect, however. Indeed, the German ZEW survey of investors’ confidence dropped for the second consecutive month to the lowest level since July earlier this week, reflecting worries that the private sector will not be able to pick up the baton and carry growth forward as the flow of government cash dries up and unemployment continues to push higher. Germany is the Euro Zone’s leading manufacturer, and weakening conditions there offer a good proxy for the trajectory of the industrial sector across the currency bloc.

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