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The Chinese trade data has been overlooked to a degree, as the figures were distorted by Chinese New Year, while the massive 48% jump in exports were helped by a low base from which to compare in 2014. If we combine the January and February numbers to try and smooth out the distortions, imports still fell a sizeable 20.2%. The more important numbers will be released this week and include CPI, industrial production, fixed asset investment, retail sales. We also get the financing numbers with new yuan loans in focus.
The US jobs report were strong as a headline number, although average hourly earnings were soft again and have been the main focal point from the doves. The nine basis point (bp) increase in US two year bond yields to 72bp tells a bigger story and highlights that the market took the fall in the unemployment rate to 5.5% as a sign that the Federal Reserve will act in June. The fed funds future is now pricing in an 80% chance of two of hikes from the Fed by year end.
Naturally, in this environment the USD has flown, with the US dollar index having its best one day gain since 2011 on Friday. The idea of central bank policy divergence is well established, but very rarely (if ever) have we seen a time when the Fed is lifting the funds rate while all other developed market central banks are easing. Since 1965, all other central banks have been hiking at the same time.
Looking at the markets, EUR/USD breezed through $1.10 and is eyeing a move to $1.08. The oscillators are suggesting the pair is oversold, but any short covering rallies will be sold into, so the question is more around compelling entry points. Parity for EUR/USD is largely being talked about, although only one FX forecasters surveyed by Bloomberg expects to see this level by year-end.
AUD/USD looks weak and my short idea from 2 March is 85 pips in the money at this stage. Looking at the daily chart there is a pronounced bear flag pattern, which would complete on a break of $0.7690. I would suggest adding to short positions on a break with a target of $0.7450.
There are sizeable vulnerabilities to the Australian economy, however, if the local unit is falling as a result of increased expectations around Fed action then it diminishes the need for near-term action from the Reserve Bank of Australia. Still, the trend in AUD/USD is lower and the path of least resistance is lower.