Australian Dollar Gains on Strong Jobs Report, Majors Rebound

Talking Points
• Australian Dollar: Employment stay hot at +22K
• Euro: Labor Costs increase substantially
• Swiss Franc: Awaiting SNB decision
• Dollar: TICS and PPI on tap

The Aussie attracted all of the speculative flow in the currency markets tonight as Australian economy generated a solid 22K jobs in February rebounding from a small contraction the month prior. The number beat market forecasts of 15K as Australian economy continues to operate at high capacity. To put the number in perspective, the Australian job growth would have been equivalent to approximately 330K US jobs – a very robust performance indeed. Although Aussie unemployment rate inched higher to 4.6% from 4.5% in January, the rise was the result of expansion in the labor force participation figures as more workers looked for employment, reducing the country’s welfare rolls. Overall, the news was nothing but positive for the Australian economy which continues to be benefit from its status as the primary supplier of key commodity inputs to China. The strong employment data along with this week’s better than expected consumer and business confidence readings made the Australian dollar the darling of the night as traders bet that the RBA may be compelled to raise rates yet another 25bp to 6.50% at its monetary policy meeting on April 3. With global equity markets finally stabilized after several days of jitters caused by the collapse of the US sub-prime market, risk appetite returned to the market and the Aussie also benefited from new carry trade positions as the AUDJPY cross climbed 60 points higher.
Meanwhile, the majors spend most of the night treading water as market participants looked to the US session for the primary event risk of the day. With both PPI and TICS reports on the calendar, the US open could see some volatility especially if the TICS report disappoints once again. As we noted in our special report yesterday, “Last months woefully low TICS number (which printed at $15 Billion versus $70 Billion projected) may have been an early sign of foreigners’ reluctance to invest into any additional US financial assets. Up to now the market has treated the news as a one-off event, but if this Thursday’s TICS data once again shows very poor capital inflows, all of the fears regarding the structural viability of US finances could return to the market. In light of the collapsing sub-prime market, these concerns could quickly morph into a massive liquidation of dollar longs.” On the other hand, a print above $70 Billion will put most of the worries to rest for at least another month and the greenback could well see a relief rally.
Finally, EZ Labor costs rose higher than expected printing at 2.4% vs. 2.2% projected. Furthermore, Q3 figures were revised upward to 2.5% from 2.0% originally. While the market ignored the data, we believe it could play a very important role in determining the monetary policy of the ECB. The European central bankers are particularly concerned about controlling wage inflation and may decide to initiate a “pre-emptive” rate hike in May rather than the current market expectation of waiting until June. Certainly the recent commentary from ECB officials from Liebscher to Garganas, suggests that the European monetary authorities’ remain steadfastly hawkish. Therefore, while tonight’s labor cost report generated little immediate impact it may carry far more influence in the long term.