Pre-Non Farm Payroll overview of the current market

As part of a new initiative to remain active, I have decided (and will try) to post weekly market briefs. I know this blog is dedicated towards technical analysis and trading off of market psychology, it is still important to be aware of where the market is headed. While this week is almost over, I will make this post about the upcoming U.S. non-farm payroll release. Starting next week, we shall get more interesting with these posts. Let’s start off with some recent events.

Australia and New Zealand

The Australia employment change and unemployment rate is due to be released shortly. From what we know so far, Australia finally cut its cash rate to the lowest 2.00% yesterday. You may be interested to know that it didn’t have the result you were probably hoping for.

AUDUSD Rate Cut to 2.00%

You may find this unexpected. Generally speaking, a rate cut or lower interest rate leads to a depreciation of the currency. This is due to an outflow or lack of demand in the Australian Dollar. A rate cut signals a need to stimulate the economy by making lending cheaper. You wouldn’t invest in a country or its market if the economy isn’t doing so well. If the economy isn’t doing well, each individual company will struggle as the economy comprises of all the individual companies. So how come there was massive buying of the Australian Dollar instead of selling it off? This is because the rate cut was expected. In previous RBA statements, the AUDUSD was set to be valued at 0.7500~. Traders have been selling off this pair in anticipation of the rate cut, which policymakers already stated of thinking of doing in the last speech. When the rate cut finally came, a lower interest rate is for stimulus. Traders decided to cover their short position and this led to a upwards spike in this pair. Why now? This is because the stimulus is expected to eventually lead to the appreciation of the Australian Dollar.

As for the upcoming unemployment claims, I am bearish on this as well. If there was a huge or significant increase in employment, then there would be no need for a rate cut. This means that the devaluation in the Australian Dollar is enough to stimulate exports and, as a result, employment should pick up. Because this did not happen, I expect a weak increase in employment or actually a decrease in unemployment. How should you trade this pair? Well, you can either buy or sell the AUDUSD or EURAUD pair. Both have very tight spreads so we look at the EURUSD pair for guidance.

Bullish EURUSD

This is the EURUSD pair, which is in an hourly bullish trend. This means that the Euro is strong than the U.S. Dollar. In the event of strong employment release, the Australian Dollar would appreciate. This would mean you should look to buy the AUDUSD pair for the maximum move benefit. If the Australian Dollar disappoints, which I highly believe so, buying the EURAUD pair is a better trade. This is because a strong Euro pairs with a weaker Australian Dollar generates a much greater movement as compared to selling a weak Australian Dollar against an already weak U.S. Dollar.

Furthermore, the New Zealand unemployment rate and employment change also disappointed. The quarterly employment change grew 0.7% while the unemployment rate remained constant at 5.8%. How can this be? One reason is both an entrance of more workers into the workforce at a same time as more people finding jobs. If we look at the relationship between the New Zealand and Australian employment data, it gets interesting.

Unemployment Rate Comparison

The New Zealand data isn’t as readily available, but clearly you can see an inverse relationship. What you should be aware of is the seasonal impact of the unemployment rate. Australia’s unemployment rate data tends to fall during the winter seasons, which you can see from the post January 1st curve. This is another indication of the unemployment rate is set to rise. However, the absolute labor force data can really affect how this percentage is presented. This is why we look at the absolute data or in this case the employment change.

Employment Change

Not the best indicator, but the New Zealand change is a leading indicator for the Australian employment change data. Given that this is the third time it reached the quarterly high, we expect the employment change to fall again especially with a cash rate cut.

Canada

The Canadian trade balance released earlier this week and it by a -3.0 billion. However, the Ivey PMI showed some extremely positive data. It looks like the Canadian Dollar has been devalued enough to stimulate the demand for Canadian goods. The PMI data sits at 58, which signals significant purchasing by suppliers and purchase managers most likely used for the production output. I would take this into consideration and offset the trade balance data as exports should pick up later on this year. I wouldn’t flip the switch and go full out bullish on the Canadian Dollar, but it does offer some predictions for the future.

United States

Rate cut is still on the table, but today’s FOMC Lockheart speech indicates a delay in the rate cut for further stimulus in the U.S. economy. ADP non-farm employment change increased less than expected. There has been much talk about a “seasonal” impact. Could the harsh winter weather be the reason for the economic slowdown? Attempts to push the S&P500 is also taking its toll as Janet Yellen warns of high stock valuations.

S&P500 CFD

Are we in a start-up bubble? Whatever the case may be, make an app and sell it as quickly as possible! Another significant factor to consider is the oil price. I have been following the actual output supply over the rig count. You would expect more rigs lead to an increase in oil supply. The exact opposite has happened since late-2014.

US Oil Production versus Rig Count

With the recent increase in oil prices, we can anticipate an increase in oil rigs as oil output resumes. The Department of Energy released the latest oil supply figures and it declined the first time since the beginning of this year.

Decrease Of 3.882 Million Barrels In Crude Inventory

The fall in crude reserves can only mean one thing – demand is picking up. It is highly unlikely to unload the supply of oil with a lack of demand. With the higher crude prices, demand should pick up with the summer travelling months. In either case, the U.S. economy remains murky at best. Although manufacturing PMI remains above 50.0, it is still underperforming against the 54.6 expectation. While unemployment claims fell, this is just the claim. Does it take into consideration of the discouraged workers? I would remain conservatively bullish of the U.S. economy as it hints at recovery.

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