In the wake of jobs data, what to expect this week

What to look for in the week ahead

Queensland flooding slows down the Aussie

The Australian dollar has fallen over 3% against the U.S. dollar since reaching record free-floating highs on the last day of 2010. This past week, massive flooding in the state of Queensland has disrupted the economy by negatively impacting resource production and allocation. Mines, roads, and railways have been incapacitated by the rising waters. As an economy that is reliant on its natural resource exports as a key driver of growth, the floods have been significantly negative for GDP growth in Q1 (Queensland accounts for roughly 80% of Australia’s coking coal exports). This downbeat outlook has reduced the RBA’s near term tightening bias and has put pressure on the AUD.

While the Queensland state government estimates that so far the floods have generated a loss of up to 5 billion AUD or about 0.4% of annual GDP, it will be some time before the damage can be fully assessed. Additionally, the Australian Bureau of Meteorology forecasts heavy rains will continue into next week. We view this as a temporary supply-side shock and note that reconstruction will generate growth in the future.

Technically, AUD/USD sees a long-term rising trend line support come in around 0.9850 and the top of its daily ichimoku cloud to lend additional support around 0.9820. This support line begins at the June lows of around 0.8080 and was most recently tested on Dec. 1. The 55-day sma is currently above that at about 0.9920 to provide initial support. The current pullback in AUD/USD may present a buying opportunity at these support levels however a break below the trendline may see towards the 100-day and 21-week sma which currently converge around 0.9710 and then towards the Dec. lows around 0.9540. A sustained move back above parity may see towards 1.0100 ahead of 1.0200 and prior highs.

Encouraging jobs data and accelerating price gains supporting the Loonie

Much has been made of greenback strength with the USD Index surging close to +2.5% for the past month to current levels near 81.00. One major exception, however, has been against the Loonie – the greenback is down -1.84% against the Loonie month to date. The fundamental backdrop behind divergent CAD strength relative to most other majors can be attributed to a dichotomy of factors.
The first is the improving economic outlook in Canada and its likely impact on policy direction. Of significant influence to this has been the spate of positive data surprises in the US – Canada ’s largest trading partner. Even more influential, however, have been implications of recent domestic data releases. Starting with the labor market, Net Change in Employment for December rose to +22k from +15.2k in November. Even more encouraging were the components of the report, full-time employment rose +38k while part-time employment declined -16k, a good sign for consumer confidence and spending which is likely to have a positive spill-over effect for 4Q 2010 GDP. Additional support to Loonie strength emanates from inflation related data. Wednesday’s higher than expected rise in November industrial product prices of +0.5% in conjunction with the +3.5% rise in November raw materials prices sent USD/CAD sharply lower from above parity to lows around 0.9930.

A second significant factor supporting the Loonie is the bullish outlook for oil prices. Improving growth outlooks and tightening supply (DOE weekly crude oil inventories have dropped for the past 5 consecutive weeks) suggest higher crude oil prices in 2011. Considering 2010’s inverse correlation of -.64 between USD/CAD and WTI oil – the outlook for higher oil translates to a corresponding strengthening in the Loonie.

Further progression in price gains, a likely possibility if Canada and US data continue down the path of positive surprises, may see the BoC consider resuming monetary policy tightening sooner relative to central banks of most other developed nations. The result is likely to see a continuation of CAD strength from a divergence in future interest rate expectations and widening differentials.

Key data and events to watch next week

Unites States: Monday – Fed's Lockhart speaks Tuesday – Dec. NFIB Small Business Optimism, Fed's Plosser speaks, Jan. IBD/TIPP Economic Optimism, Nov. Wholesale Inventories, weekly ABC Consumer Confidence Wednesday – Dec. Import Price Index, weekly DOE U.S. Crude Oil Inventories, Fed's Beige Book, Thursday – Weekly Jobless Claims, Dec. PPI, Nov. Trade Balance, Bernanke Speaks Friday – Dec. CPI, Dec. Advance Retail Sales, Dec. Industrial Production & Capacity Utilization, Jan. preliminary U. of Michigan Confidence, Nov. Business Inventories, Fed’s Lacker & Rosengren speak

Euro-zone: Monday – French Nov. Industrial & Manufacturing Production, EZ Jan. Sentix Investor Confidence, Tuesday – French Dec. Business Sentiment Wednesday – German 2010 GDP, EZ Nov. Industrial Production Thursday – EU's Van Rompuy speaks, Jan. ECB Interest Rate Announcement Friday – German Dec. final CPI, Dec. EZ CPI, Nov. EZ Trade Balance

United Kingdom: Tuesday – BRC December Retail Sales Monitor Wednesday – BRC Shop Price Index, Nov. Trade Balance Thursday – Nov. Industrial & Manufacturing Production, Jan. BOE Interest Rate Announcement, Dec. NIESR GDP Estimate Friday – Dec. PPI

Japan: Tuesday – Dec. Official Reserve Assets, Nov. preliminary Leading & Coincident Index CI Wednesday – Dec. Bank Lending, Nov. Current Account, Dec. Eco Watchers Survey Thursday – Nov. Machine Orders, Dec. preliminary Machine Tool Orders Friday – Dec. Domestic CGPI

Canada: Monday – Nov. Building Permits, 4Q Business Outlook Future Sales, 4Q BoC Senior Loan Officer Survey, BoC Cote speaks Tuesday – Dec. Housing Starts Wednesday – Nov. New Housing Price Index Thursday – Nov. International Merchandise Trade

Australia & New Zealand : Monday – Nov. NZ Trade Balance, Imports & Exports, AU Dec. AiG Perf. of Construction Index, AU Dec. Retail Sales Tuesday – 4Q NZ NZIER Business Opinion Survey, Nov. NZ Building Permits, Nov. AU Trade Balance, Wednesday – Nov. AU Home Loans and Investment lending Thursday – Dec. NZ Business PMI, Dec. NZ Card Spending, Dec. NZ House Prices, Dec, AU Employment Report, Dec. NZ ANZ Commodity Price

China: Monday – Trade Balance (USD) Thursday – Conference Board China November Leading Economic Index

Brian Dolan is chief currency strategist at www.FOREX.com.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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