Bank of Japan Holds, Aussie Rallies at End of Asian Week/Non-Farms Leave Traders Scrambling

[Chief V]

Bank of Japan Holds, Aussie Rallies at End of Asian Week

The USD was soft in Asian trading overnight, giving up fresh ground to many of the crosses while investors came to grips with the new QE2 environment and fretted about this morning’s employment numbers. The Dollar Index traded sub-76.00 through the Asian session as many of the crosses picked up ground; AUDUSD, however, which has become the world’s darling long play this week, impressed the most. It’s easy to see why the market is bullish Australian dollars, when in the same week that the Federal Reserve announced its new Quantitative Easing program, the Reserve Bank of Australia increased interest rates by 25 basis points. This puts Australian interest rates at 4.75% (and the American equivalent at near-zero)—among the highest in the developed world. The pair felt out new 28-year highs overnight near the 1.02 figure before pulling back on what looks like profit taking.

In other Asian news, the Bank of Japan disappointed markets when it opted not to attempt to keep pace with the US Fed’s $600-billion asset purchasing program. Given the tension over the speculative rally in the yen lately, many were expecting the BoJ to announce its own asset purchasing program to help take the pressure off the domestic unit. Conscious of the risk that additional dollars in the market pose to the yen and aware of investors’ expectations for an in-kind gesture, BoJ Governor Masaaki Shirakawa tried to defuse traders by noting that he “...does not see Japan and the United States as in a monetary easing competition.” He added that the Japanese central bank was ready at any time to expand its asset-buying program to add liquidity to the market, but for the time being he felt that upside and downside risks were balanced.

Non-Farms Leave Traders Scrambling

This morning’s US employment data caught the market by surprise. The October number showed an increase of 151K, beating the Reuters survey of +60K. Furthermore, the critical private sector jobs component returned an impressive +159K, indicating that private firms are starting to hire again. The big gains were made in the service, professional, and temporary help sectors. The biggest losses were seen in the manufacturing and leisure sectors. The unemployment rate held steady at 9.6%, showing that more people in the United States are now looking for jobs.

The market reacted to this morning’s data by short-covering some of the outstanding Big Dollar positions. The Dollar Index has bounced off the 11-month low it printed overnight at 75.63 and, in a knee-jerk reaction, rallied to 76.63, though it has since pulled back to 76.40 at the time of writing. The big moves came in the euro and the yen, which leading up to QE2 over the last few weeks had been the main benefactors of USD bearishness. Following the data, USDJPY shot up through the 81.00 handle, pausing on the heavy tone with which =the pair has been trading lately. The euro, which had been heavy through the European trading session after concerns over Ireland’s austerity plans drove peripheral euro-zone CDS spreads out, accelerated its decline well into the 1.4000s. European traders just weren’t buying Ireland’s proposed new budget, which includes EUR six billion of spending cuts and tax hikes, and the resulting uncertainty led to euro weakness.

In contrast to the EUR and the JPY, the AUD and the CAD have actually made up ground against the USD following the employment release. Canadian employment data was also released this morning (about an hour ahead of its American counterpart) mostly in-line with expectations, printing a monthly increase of 3K jobs, which pushed the unemployment rate down to 7.9%. While the Canadian data on its own didn’t really change the views held by traders, the better-than-expected US release was seen as positive for the Canadian economy given how deeply it is tied to the US economy. As such, the Loonie has picked up about 50 pips and is testing parity once again. The Aussie dollar, finally, which had a strong overnight session, is again on the bid as investors seek the yields that the AUD offers. The AUDUSD is again testing its fresh 28-year high.

Have a great weekend!

By David Starkey, FX Trader,

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