A Dominant Carry Trade That May Be Back on
The Australian dollar (AUD) was the star performer in overnight Asian and early European trade after the employment report revealed a mind-boggling 71K new jobs versus only 10K expected. However, questions emerged regarding the accuracy of the report and the AUDUSD pair traded off its highs by mid-morning European dealing.
The Australian labor data was truly astounding, as the economy created the most new jobs in more than a decade. In addition, the unemployment rate declined to 5.3% from 5.4% expected, and the labor participation rate rose an impressive 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 just a single month.
Digging deeper, 80% of the gains came from Victoria and New South Wales—the service centers of the Australian economy—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 Australian economic growth, is now slowing markedly. It also raises questions about the accuracy of the data, given such a massive upside surprise and such uneven distribution of job growth. Indeed, a Reserve Bank of Australia (RBA) official suggested that there may have been a statistical error in this month’s calculations, but no further explanation has been given as of yet.
Regardless of the final adjustments in the labor data, today's 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 six basis points (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 distinction as the pre-eminent carry trade driver in the G-10 universe. That is likely to push AUDJPY through the key 100.00 barrier in the coming days.
Watch for Test of Lower EURUSD Price Level
Meanwhile, in Europe, the EURUSD treaded water in a tight, 1.2980-1.2950 range and slipped lower as dealing progressed on news that the Bank of Italy asked those banks that reported a loss on tier 1 capital to not pay out dividends this year.
In addition, Spain went to market with some very long-term issuance and was able to obtain better yields (5.445% versus 5.928% the period prior), but only sold EUR800 million of a planned EUR 1-2 billion, indicating that investors remain wary of assuming too much long-term credit risk in the Eurozone periphery.
The EURUSD pair continues to trade with a downward bias as news out of the Eurozone remains bleak. Wednesday’s break of the key 1.2950 level suggests that shorts may want to test the 1.2900 figure as Thursday trading proceeds.
By Boris Schlossberg of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.