Considering the lousy US NFP report and ominous Australian PPI data, the only upside surprise on Friday was seen in the UK, where the construction PPI report blew away consensus estimates.
High-beta FX was divergent ahead of today’s US non-farm payrolls (NFP) report with European currencies mildly bid against the US dollar (USD). Meanwhile, AUDUSD slid to yet another fresh yearly low after it broke the key .8900 level. Asian and European trade was mainly driven by the latest economic data, and markets were unusually lively considering the looming NFP report.
In Australia, the PPI data printed much cooler than expected, coming in at 0.1% versus 0.5% forecast, as wholesale price pressures effectively disappeared. The news sent the Australian dollar (AUD) tumbling because low inflation readings offer the Reserve Bank of Australia (RBA) more scope for rate cuts without any concern about price increases.
The low level of producer price inflation only underscores the weak demand in the Australian economy, which is adjusting to the decline in Chinese growth. The chance of an RBA rate cut has now increased, adding further pressure on AUDUSD, which cracked the .8900 level for the first time this year.
More Standout Data from the UK
In Europe, the news on the economic front was better, with Spanish unemployment declining by 64.9K, which was a bit worse than the 80K forecast, but still showed a sizeable reduction in jobless rolls.
Meanwhile, in the UK, the construction PMI data blew out estimates, printing at 57 versus 51.6 expected. This was the best reading in more than three years and the second upside surprise from the UK this week. Looking ahead, if next week's PMI services report prints at similar levels, any anticipation of additional accommodation from the Bank of England (BoE) is likely to disappear.
The GBPUSD pair traded to a high of 1.5175 in the aftermath of the construction PMI report, but remained capped by the 1.5200 level ahead of the US NFP data.
NFP Report Posts Surprise Disappointment
With US data posting solid upside surprises this week, market expectations for a strong NFP report had taken over. Given the strong readings in ADP and ISM manufacturing data, as well as the weekly jobless claims, today’s NFP reading of 162K will be viewed with disappointment.
However, the most accurate predictor of the NFP—the employment component of the ISM services report—will not be released until Monday, so traders had limited visibility into today's labor data. There is also a chance that some of the more bullish data this week could have been subject to seasonal factors. In any case, a print of 175K or so was largely baked into the market going in.
Had the US NFP data been unequivocally stronger, the pressure on the Federal Reserve to begin tapering by September would have grown exponentially.
By Boris Schlossberg of BK Asset Management
