All eyes on the non-farm payrolls

Equities have sprung to life in Asia and are set to finish the week on a high ahead of the crucial non-farm payrolls data.

Continuing US dollar strength has dominated sentiment in Asia as traders position themselves ahead of the data. Strong reads for US unemployment claims (326,000 versus 345,000) and ISM manufacturing PMI (55.4 versus 52 consensus) set the tone for a US dollar and equities rally, as both readings smashed expectations. The US dollar index has spiked to around 82.37 and might be in for a move to 83 in the near term.

USD/JPY is the biggest beneficiary of the USD strength, as USD/JPY jumped to ¥99.70, which is a sharp reversal after a long period of underperformance, battling under ¥98. This has really driven the Nikkei higher today and seen it lead Asia north with a 1.7% gain. Any further USD gains could see the pair test ¥100 heading into the weekend.

AUD/USD has been hit hard on both sides of the equation with USD strength driving the pair lower, while weak fundamentals on the AUD also weigh. Although AUD/USD managed to bounce off $0.89, it remains bearish with a disappointing PPI (+0.1% versus +0.5%) reading sealing the AUD’s fate. We feel traders could look to sell rallies into 0.90 in the short term, and the bulls will be hesitant to bid it higher heading into the RBA decision.  The economic policy statement by Treasurer Chris Bowen has also cast a bit of uncertainty on the local currency with cuts to Australia’s growth and revenue forecasts along with a proposed bank levy.

With the S&P trading through 1700 for the first time ever, it has been one-way traffic for equities as the ‘fear of missing out’ sets in. The Hang Seng and Shanghai Composite are around half a per cent firmer, while the ASX 200 has climbed 0.9%. There isn’t much on the economic calendar in Asia today, but there is some positioning ahead of the non-farm payrolls print later today.

Following the positive prints from the ADP number and unemployment claims, no doubt expectations will now be high that the data will impress. The consensus for the non-farm payrolls print is 185,000, which is lower than the previous print of 195,000. Some of the more optimistic analysts out there like Goldman Sachs are expecting a NFP print of 200,000. This is a clear sign that perhaps the market estimate is a bit too conservative. Unemployment is expected to fall to 7.5% (from 7.6%). Fed member James Bullard is also set to hit the wires post the jobs data and this might also be a source of volatility.

While the ECB and BoE were non-events yesterday, European markets are looking to add on to yesterday’s gains at the open. So far we are calling the major European bourses between 0.3% and 0.5% higher at the open. EUR/USD is just holding above 1.32 despite some mixed comments from ECB President Mario Draghi. While Draghi hinted that a recovery is underway, he also said the current expectations of rate hikes in money markets are unwarranted.

The ASX 200 charged 1% higher today and is back above 5100 for the first time since the May sell-off. Unless there is a rapid sell-off into the close, we are headed for the tenth positive finish in a row. Since the reversal on 25 June, the local market has put on 10.4%. Our two biggest sectors (materials and financials) are firing today and have led the market higher. BHP has tacked on 1.3% and RIO has surged 1.9%. However, gold miners are underperforming with Newcrest down 1% as the USD strength weighs on the precious metal. Gold dropped into the 1303 region and it looks like it is on the verge of breaking 1300 again. There is potential for volatility in gold later today with non-farm payrolls being the key event risk of the session. Any surprises higher in the data would push the greenback higher and weigh on gold further. The big banks are all 1% plus firmer as they recuperate from yesterday’s sharp slide caused by reports of the bank levy. The weaker AUD and prospects of a 25 basis point rate cut next week are the factors keeping investors optimistic heading into the weekend.

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