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FXPRIMUS Market Brief of the Week: Market Ignored Subdued U.S. Payroll Report

SINGAPORE, SINGAPORE -- (Marketwired) -- 02/11/14 -- In FXPRIMUS' Market Brief of The Week for 10 February, the brokerage firm's Senior Economist, Jimmy Zhu, looks at reactions to the U.S. Nonfarm Payrolls (NFP) Report.

Economic Insights

NFP Expanded Less Than Expected, While Unemployment Fell

The 5% decline in U.S. equities since 15 January reflected many "risk on" positions being either closed or scaled back on concerns about emerging markets economy and softer U.S. growth. Further downside economic surprises in near future may result in a continued reallocation of portfolios away from equities to the safer bonds and Yen. But Asian market sentiment looks quite solid today despite subdued payroll figures in the U.S., with Morgan Stanley Capital International (MSCI) Asia ex-Japan Index rebounded 0.8%, and Shanghai Composite Index rallied close to 2%.

The NFP rose less than expected last month, jobless rate unexpectedly dropped to the lowest level in more than five years, moving closer to the Federal Reserve's (Fed) key threshold at 6.5%. The figures here makes Janet Yellen's job tougher where monetary policy is concerned. The 113,000 NFP gains were much lower than the earlier estimate of 180,000. Unemployment declined to 6.6%, which was the lowest level since October of 2008. The positive news here is that labour participating rate rose to 63%, from 62.8% in the previous month. However, it is still way below the average level in 2013, indicating that the size of the labour force has been decreasing.

U.S. NFP (white), U.S. Unemployment rate (yellow), and U.S. labour participating rate (blue)

To view the figure accompanying this press release, please visit the following link:

http://media3.marketwire.com/docs/926800.jpg

There are two focuses this week which may attract investors,

1.  One of the top focuses this week may be the new Fed's chair, Janet
    Yellen's two speeches (formal presentations). She will offer her first
    semi-annual report on monetary policy before the House on 11 February,
    then before the Senate on 13 February. In our point of view, she will
    continue to stick with the Fed's 2014 earlier forecast, although
    concerns about the economy and volatilities in global financial markets
    provide a more difficult environment for the Fed. For this week, Yellen
    can wait as there is no Federal Open Market Committee (FOMC) meeting
    this month. The next FOMC meeting will be in March. She can consider all
    these political and monetary policy issues then. She would not need the
    answer for her semi-annual testimony before the House and the Senate due
    to the fact that she does not have to lead an actionable policy move
    until 19 March. All in all, investors may not hear anything regarding
    the key Fed's policy from the two presentations.
2.  The other top focus will be that members in the Euro Zone will release
    its 4Q GDP, including the aggregated ones. We estimate that the
    aggregated Euro Zone's GDP will be printed around 0.2-0.3% from the
    previous 0.1%. We think that it is one of the main reasons that the
    European Central Bank (ECB) put everything on hold last week. As long as
    the final figure on Friday confirms that, it echoes with the ECB's
    vision of a gradual recovery. Another key thing to watch is that whether
    most of the major countries are showing positive quarterly growth, and
    this is needed in the Euro Zone.

According to the ECB's meeting last week, it eliminated chances of a rate cut in March as well. First estimation of February's inflation data will be released on 28 February. So far the figures are not clear as there are no hints from the ECB. But any outcome that is weaker than expected could add pressure for the central bank to act, because currently there is no sign that the ECB is going to change the inflation projection of 1.1% this year.

The market still expects the ECB to act in the coming few months. Sovereign yields in the Euro area's peripheral nations are falling as investors perceive their economy is recovering from the debt crisis. Yesterday, government bond yields in Italy, Spain and Portugal fell to the lowest level since 2010. Portugal's 10-year yield dropped to 4.97% from 17.4% in January of 2012. The Euro strengthened last week against the Dollar after the ECB meeting. The ECB may not like to see this as it deteriorates inflation, which may prompt Mario Draghi to step in to act again.

In Asia, Aussie still has difficulties to penetrate above 0.90% against the Greenback. Chinese monetary policy risk plays a large role here. The People's Bank of China (PBOC) said that the money markets should tolerate rate changes, potentially stoking volatility and financial system risk few days ago. The 7-day interbank repo rate has already fluctuated more than 1,000 BPS in 2013, while the 14-day rate has swung by 740 BPS. Volatility may hurt borrowers and small-to-medium banks. It helped fuel cash crunches in June and December last year, along with the falling liquidity.

Top News This Week
Euro Zone 4Q Gross Domestic Product (GDP) QoQ
I expect figures to come in at 0.3%
U.S. Retail Sales MoM
I expect figures to come in at -0.1%

Trade Recommendation
AUDUSD - Short at 0.8990

U.S. Dow Index has climbed almost 3% in last Friday's close since the Monday low, even after we see the tepid NFP report. It looks like that the market seems to believe that the slower jobs added was mainly due to bad weather in the U.S. Given the fact that the coming FOMC meeting will be in March and Yellen is unlikely to change the U.S. economic forecast lower this week before the Congress and the Senate, little fresh triggers could push the volatilities higher substantially.

Should confidence improve in the largest economy, the USD's downside could be limited. Among the major pair, AUDUSD is moving toward its resistance level around 0.90.

We would like to short this pair if its price rebounds to 0.8990.

Entry Price - 0.8990
Stop Loss - 0.9050
1st Target Price - 0.8940
2nd Target price - 0.8900

To view the figure accompanying this press release, please visit the following link:

http://media3.marketwire.com/docs/926800B.jpg

ABOUT FXPRIMUS

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