February 8, 2016

Markets Today: Monkey Business

Welcome to and best wishes for the Year of the Monkey.

Welcome to and best wishes for the Year of the Monkey.

China on Sunday reported its January FX reserves data. After adjusting for valuation changes arising from weakness in estimated non-US dollar reserve holdings during the month, and the reserves-boosting impact of ongoing trade surpluses of more than $50bn. a month, we reckon the PBoC will have sold some $130bn. Worth of FX reserves last month to limit weakness in the renminbi. This would be down on December (when we estimated intervention at more like $170bn) and a bit lees that the $118bn median expectation Bloomberg were showing on Friday. Though intervention on this scale still means sizeable rebalancing flows including sakes of AUD (and probably NZD too) there should be some relief the reserves drop was not larger.

As for Friday’s markets, just when many has been starting to write the US dollar’s epitaph, it roared back to life – no more so than against the AUD. This was in the wake of a US payrolls report that, as far as equity markets were concerned, wasn’t weak enough to keep the Fed stuck where it is indefinitely, but wasn’t strong enough to allay fears that the economic slowdown evident in the fourth quarter might be more than temporary (and that corporate profit margins might be set for a further squeezed given evidence that wages growth is finally accelerating). The S&P 500 traded south throughout the New York session to close down 1.85% while the NASDAQ lost a cool 3.25% led by a 40% slide in the share price of Linkedin. US Treasury yields ended virtually unchanged at 10 years after having added 5bp from pre-release levels, while 2s ended just 2bp higher. This was after the algo crowd had dutifully sold the dollar and bought bonds on the weaker than consensus headline payroll number.

The payrolls report showed headline non-farm payrolls at 151k – beneath the 190k consensus but probably not far short of the whisper number going into the release. A downward revision to December (now 262k not 292k) was offset by an upward revision to November (280k not 252k). The unemployment rate fell to 4.9% from 5.0% even though the participation rate rose to 62.7% from 62.7% (as expected) with the U-6 underemployment rate steady at 9.9%. The most-market moving element of the report was average hourly earnings, jumping by 0.5% on the month not the 0.3% expected. Annual growth is now 2.5% (2.3% expected) down from a sharply upwardly revised 2.7% in December, thanks to a high-side print last January (0.6%).

In currencies, DXY gained 0.58% to 97.03, led by a 0.6% fall-back in EUR/USD to 1.1158 but held back by a virtually unchanged USD/JPY (+0.08% to Y116.87) and USD/CHF -0.23% – further testament to payrolls not being a risk-positive event. The broader BBDXY added 0.63% and ADXY fell by 0.27%. Though commodity prices were set back by the stronger dollar, it was commodity currencies that fared worse Friday. AUD -1.86% to 0.7067, so well shy of weekly closing levels near 0.72 that would have many seasoned technical analysts calling a cyclical low in the Aussie. NZD -1.4% to 0.6629 and CAD -1.2% to 1.3917, the latter drawing some support from an out-sized jump in the Ivey PMI – this after a weaker than expected Canadian employment report (employment -5.7k and unemployment 7.2% up from 7.1%).

Commodities saw Brent crude -$0.40 to $34.06 and WTI -$0.80 to $30.89. The LMEX index lost 1.74% but iron ore added 20 cents to $45.73. Gold was flat at $1158 – sandwiched between ‘risk-off’ support and the US dollar’s revival.

Coming Up

Today is the first day of the Lunar New Year holidays (which runs all week in China, Mon-Wed in Hong Kong and Mon-Tue in Singapore). Together with the Waitangi Day holiday in New Zealand, this leaves Sydney and Tokyo to run the show at the start of the week.

Central bank speak looms large, with Fed chair Yellen testifying before Congress on Wednesday and Thursday and RBA governor Glenn Stevens on Friday before the House of Representatives Standing Committee on Economics.

It’s not a big week for data anywhere in the world, but locally both the January NAB business survey Tuesday and consumer confidence on Wednesday are of note. In the US retail sales and consumer confidence – both on Friday – look like being the highlights.


On global stock markets Friday, the S&P 500 was -1.80%. Bond markets saw US 10-years -0.38bp to 1.84%. On commodity markets, Brent crude oil -1.16% to $34.06, gold+0.0% to $1,158, iron ore +0.5% to $45.73. AUD is at 0.708 and the range since Friday local closer was 0.7067 to 0.7219.

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For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets


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