The payrolls report for February was as bad as the market feared. Non-farm payrolls fell by 651k, in line with the average deterioration in the job market over the past three months at 644k of job losses per month. The unemployment rate surged 0.5 percentage points to 8.1%. As you recall, in Pro Traders Club, we projected it to print above 8.0%. However, the rise in unemployment was also exacerbated by a rise in the labour force participation rate. Still, as UBS economists note, aggregate hours worked have fallen at a 8.1% annual rate so far in Q1, consistent with a decline in national output.

Data in the week ahead is relatively light. Retail sales for February are due on Thursday and the market expects a 1% m/m, following the 0.5% m/m contraction in January. The University of Michigan consumer sentiment index for March (preliminary reading) is due on Friday and the market expects a deterioration to 55.0 from 56.4 in February.

The US dollar has benefited since the Lehman collapse from risk aversion as investors seek liquid securities. Investors remained very concerned also about the linkages between Eurozone and Eastern Europe bank risk. We suspect that this will remain the case for now and accordingly have a near-term downward trajectory expected for EURUSD. Over the longer-term, investors should keep an on relative money supply growth as yield differentials will matter less as central banks engage in quantitative easing and governments massively expand fiscal issuance. For more information in Yield spreads and their influence on FX rates, be sure to view my 6hr webinar titled “Inside the Banks.”

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Investors will remain focussed on the nexus between the Eurozone banking sector and the woes of Eastern Europe. We believe this will be a primary contributor to a weakening EUR over the coming months, combined with the repatriation strength of the USD, we are likely to see EURUSD lower over the longer term.

As such, comments on that front by policymakers should be closely watched. On the data front German and French CPI inflation is due as are Eurozone retail sales and German industrial production. Several ECB members will also speak and their comments will be closely followed to assess the extent of quantitative easing that could be considered in the Eurozone. Given the above concern, EURUSD will remain under pressure, although this is a very consensus view at the moment and investors should be flexible.

The RBA's recent decision to pause will likely have little bearing on the RBNZ, which has indicated a readiness to cut further and to hold rates low for a considerable time in the context of a weaker economy. The global backdrop has not stabilised and current monetary/fiscal stimulus has not yet produced tangible results. We expect the RBNZ to cut the official rate by 50bp to 3.00% from 3.50%. The market is looking for a more aggressive cut of 75bp, hence we could see NZD strengthen on the heals of the gap between overall expectations and the cut lighter than expected.. The economic outlook in New Zealand is deteriorating and further monetary easing will be necessary. Retail sales for NZ are due on Thursday and we expect a flat result in January following the 1% m/m reduction in December. In Australia, the labour force survey is due on Thursday and the market expects a 20k decline in employment. We have confidence in the AUD as a long-term store of value and hold a AUD 6m call option against a basket of G3 currencies. We expect gradual upside in AUDNZD.


Source: UBS, Bloomberg, Chris Lori

Tags: USD