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Australian dollar, asset prices under pressure as US strengthens

The Aussie looks set to open domestic trade below US77.20¢ on Monday. Photo: AFRThe Australian stock market could open more than 1 per cent lower and the dollar around six-year lows after a dramatic surge in the greenback and Treasury bonds because of stronger than expected job numbers in the US.
Nanjing Night Net

The Aussie looks set to open domestic trade below US77.20¢ on Monday after plunging more than US1¢ to an intraday low of US77.11¢.

The local unit last dropped, briefly, below US77.20¢ a month ago.  However, it hasn’t held at these levels since May 2009.

Australian bond and stock prices will also remain under pressure this week as global markets adjust to fresh signs the US Federal Reserve may be forced to lift interest rates sooner rather than later.

According to the SPI futures contract for March 15, the main S&P ASX200 index will open 64 points, or 1.1 per cent, lower on Monday.

The trigger was a report from the US Labor Department early on Saturday Australian time showing that the economy added 295,000 jobs in February, compared with a Bloomberg survey forecast of 235,000.

The jobs surge drove the official US unemployment rate to 5.5 per cent, close to a seven-year low, and compared with 5.7 per cent last month. However, the improvement was offset with softness in average hourly earnings, which grew only 0.1 per cent, compared with market forecasts of 0.2 per cent.

Nonetheless, the data surprise sparked an immediate sell-off in US long bonds. The 30-year yield, which moves inversely to price, jumped 25 basis points to 2.84 per cent.

At the 10-year maturity, the yield rose from 2.11 per cent to 2.24 per cent as traders recalibrated their inflation expectations for the rapidly recovering US economy.

Futures market bets that the US Federal Reserve would begin monetary tightening by September climbed from 49 per cent to 60 per cent after the job market report.

This increasing divergence between the US economic fortunes and those of the rest of the world, including Australia, threatens to drive the greenback even higher against a range of currencies as yield-seeking investors pile into US dollar assets.

However, revised inflation expectations are bad news for equities. US stocks also sold off on Friday and the benchmark Dow Jones industrial average index ended the session down 1.54 per cent at 17856.78.

“The jump in 10-year yields and slide in equities confirms that the focus for investors across the financial markets is now on tightening in June instead of September,” BK Asset Management’s managing director for foreign exchange strategy, Kathy Lien, said.

However, she cautioned: “A hike in the [northern] summer is not a done deal because the central bank could still find reasons to be patient, particularly since low inflation remains a problem in the US and the rest of the world is dealing with deflation.”

Meanwhile, the Australian 10-year government bond climbed 12 basis points to 2.74 per cent, the highest implied yield since early January this year.

Mixed Chinese trade data on Sunday could also undermine confidence in Australian securities this week. The value of imports was down heavily year-on-year in February but exports were stronger than expected.

The statistics showed a heavy fall in commodity prices over the 12 months, although volumes eased only slightly.

“For instance, iron ore imports declined sharply – by 45.4 per cent year-on-year in value terms in January-February – but only registered a 0.9 per cent drop in volume term,” Australia and New Zealand Banking Group noted.

With Australian data flow this week dominated by February job figures and private sector consumer and business confidence surveys, market traders will be looking for further signs of domestic economic weakness.

ANZ’s forward-looking job advertisements series is the first indicator of the week, on Monday, followed by National Australia Bank’s business confidence survey on Tuesday.

Wednesday brings the latest Westpac consumer sentiment reading, monthly home loans data and an address by Reserve Bank of Australia assistant governor Christopher Kent in Hobart.

“Business confidence is expected to make little improvement in the February release due to the political uncertainty that characterised that month,” Bank of America Merrill Lynch economist Alex Joiner said in a note.

“The lower Australian dollar is a double-edged sword; being good for exporters but not for importers, most notably the retail sector, so its impact will be mixed.

“Oil prices should support sentiment in transport sectors, yet lower commodities prices more broadly will continue to keep sentiment subdued,” he said.

Thursday’s market-moving event is the February unemployment figures.

A Bloomberg survey of 28 economists indicates an unchanged unemployment rate at 6.4 per cent, after a 15,000 net gain in jobs. The participation rate is also expected to be unchanged at 64.8 per cent.

However, Bank of America Merrill Lynch is forecasting a slight improvement in the unemployment rate to 6.3 per cent, based on a drop in the participation rate.

“Outside of the volatile monthly reads, we expect the labour market to be soft for some time to come and the trend rise in the unemployment rate will not abate on a sustainable basis until late in the year,” the bank said.

Any negative surprises in the employment data will weigh heavily on RBA deliberations on monetary policy and increase the sense of divergence between the US and Australian economies.

This would provide further support for the greenback as bets mount of another cash rate cut by the Reserve Bank of Australia.

US data out this week include February retail sales on Thursday and the University of Michigan’s confidence measure for March.

Across the Tasman Sea, markets widely expect the Reserve Bank of New Zealand on Thursday to hold the cash rate at 3.5 per cent, with the neutral policy bias intact.

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