Morning Commentary: On Second Thought

Foreign Exchange - Morning Commentary
On Second Thought
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The Aussie dollar had a volatile session yesterday.  Initially, the AUD spiked higher after the jobs report showed a greater than expected increase in jobs as well as a drop in the unemployment rate.  However, as we moved through the session, the AUD slowly but surely gave up all of its gains and more and ultimately finished the session flat.  This price action likely had to do with the details of the jobs report as part time job additions drove the entire gain (part time +29.2k, full time -0.3k).  Overall, the labor market momentum remains restrained.

Regarding the drop in the unemployment rate, the bushfire crisis likely played a role in this.  The drop in the unemployment rate was partially driven by the relatively low participation and slower labor force growth.  Additionally, some of the part-time gains are likely due to the increase in firefighters.  This narrative is supported by the fact that the state of New South Wales had the largest uptick in employment. 

The Reserve Bank of Australia (RBA) is set to reconvene in February and is scheduled to reassess the economy at that time.  Given the headwinds to the economy, including issues added by the bushfires (reduced likelihood of stimulus given bushfire spending and reduction in near term consumption), the bias remains for a cut.  We do acknowledge that the bar for further easing has been raised given the RBA’s proximity to the effective lower bound, raising the risk for a delay.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Flash PMI data beat expectations in the UK and Germany.  In the UK, the PMI data rose to its highest levels since September 2018.  In Germany, the composite PMI print was the best since August 2019.  The EZ PMIs came in mixed with the service and composite reading slightly missing expectations but remaining in expansionary territory.  Notably manufacturing PMI beat expectations but still remained in contractionary territory.  Nevertheless, the overall positive surprises across countries support the narrative that global manufacturing is recovering.    
  • US PMIs came in mixed with manufacturing PMI disappointing but services and composite PMI prints beating expectations.  All readings remain in expansionary territory. 
  • The ECB meeting yesterday was uneventful from a near term policy perspective.  The central bank expressed increased optimism on the outlook and inflation as downside risks were upgraded to “less pronounced” from “somewhat less pronounced.”  The ECB also announced that its strategic review should be completed this year and will focus on communication, the definition of price stability, and the monetary policy toolkit. 
  • President Trump is scheduled to sign the USCMA trade deal next Wednesday.
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