Another solid labor market report increases odds of tapering in December
Global equities gained after the labor report released, signaling that the world largest economy is on track for recovery. Non-Farm Payroll (NFP) rose by 203,000 last month, beating the consensus forecast. Meanwhile, the jobless rate fell to a five-year low of 7.0%. Ben Bernanke mentioned a few times in the past months that the Federal Reserve (Fed) could consider ceasing the Quantitative Easing (QE) program if the unemployment rate hits 7.0%.
The release of the November U.S. employment report heightened speculation that the Fed could start tapering its USD85 billion a month QE program as early as this month. However, the Dollar only outperformed the Yen but weakened against other currencies. Unfortunately, I haven’t found an absolute “convincing” reason for this. These could some reasons triggering this kind of price reaction:
- The market may guess that Fed members would strengthen forward guidance and highlight the vulnerable economy. The purpose of doing this is to cap the bond yield below 3%. However, the market seldom has knee-jerk reactions like this.
- The bond yield moved lower, then the Greenback followed. However, there is a question on why the bond yield shifted lower after a solid labor report.
- Risk on trade; investors used cash (Dollar) to buy equities. There is another problem here: the “Risk on, Risk off” methodology is only applied well during times of crisis. This is why we nearly didn’t see it this year, except for the “Cyprus Saga” in March.
There is good news for investors. You do not have to struggle to find the truth. U.S. equities and the USDJPY seem to be in a “clean” direction regarding the move on tapering speculation. U.S. equities even have a higher chance for one direction – North. Good economic data indicates a positive operating environment for corporations; bad economic data increases the chance for the Fed to delay the pace for tapering. Neither is treated as negative for stock prices.
There will be an active debate on whether to taper at the Federal Open Market Committee (FOMC) meeting on 17 and 18 December, given that the purpose of asset purchases was to generate a sustained momentum in the economy. Therefore, data must meet a slightly higher hurdle to justify a move.
Other complications in making a decision to taper include reaching an agreement on an offsetting policy action, lower market liquidity near Christmas, and weakening inflation data.
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Reserve Bank of New Zealand (RBNZ) Rate Decision
I expect figures to come at in 2.5% unchanged.
Australia’s Unemployment Rate
I expect figures to come in at 5.8%.
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Short AUDNZD at 1.1055
The AUDNZD was in a clear downtrend since March this year, and the pair dipped below the key level at 1.10. Strong exports data released over the weekend failed to buoy the Aussie earlier this morning, suggesting that there are fewer fundamental catalysts to support the Aussie dollar now. For the Kiwi, no rate adjustment by the RBNZ could lift the Kiwi.
I would like to short the AUDNZD if the pair rebounds to 1.1055,
Entry Price = 1.1055
Stop Loss = 1.1205
1st Profit = 1.1005
2nd Profit = 1.0950
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