The US labor market cooled somewhat in May, data showed on Friday. Nonfarm payrolls rose by 138k, notably less than the consensus of 185k, while last month’s figure was revised down to 174k from 211k previously. The unemployment rate ticked down, but that decline was probably owed to a drop in the labor force participation rate. This suggests that people may have been discouraged and perhaps stopped looking for a job altogether, resulting in fewer registered unemployed people. Meanwhile, average hourly earnings slowed to +0.2% mom in line with expectations from +0.3% mom, though that kept the yearly rate unchanged at +2.5%.
USD/JPY tumbled on Friday following the softness in the US jobs data. The rate slid after it hit resistance near 111.70 (R2) to find support at the 110.30 (S1) barrier, marked by the low of the 18th of May. The price structure on the 4-hour chart suggests a short-term sideways range, between that obstacle and the resistance territory of 112.15 (R3). As a result, given our proximity to the lower bound of the range, we think the pair could rebound somewhat today and recover some of Friday’s losses.
Despite the softness in these data, the Fed remains on track to raise borrowing costs next week, evident by market pricing for a June hike, which at the time of writing rests at roughly 95% according to the Fed funds futures. Given that a rate increase is almost fully priced in, we believe that market focus on the day will be on any signals the Committee’s sends with regards to future hikes. Specifically, we will look for clues on whether or not the FOMC will deliver a “dovish hike”, communicating that the recent softness in the data could lead to slower hikes in the future. Indeed, slowing inflation, falling inflation expectations and flat wage growth, are all strong arguments in support of a relatively cautious tone by policymakers.
RBA policy gathering in focus
During the Asian morning Tuesday, the RBA policy decision will be in focus and the forecast is for the Bank to keep its policy unchanged. The minutes of the latest gathering showed that the Bank is still concerned about employment, noting that it is “carefully monitoring” developments around the labor market. Nonetheless, April’s employment data that were released after that meeting were particularly strong, and we think that the Bank is likely to acknowledge this progress.
That said, we expect policymakers to refrain from appearing too upbeat. Even though Australian data are improving, some forward-looking indicators of the Chinese economy suggest economic activity there is cooling. Specifically, the Caixin manufacturing PMI entered the contractionary territory in May, which is likely to be worrisome news for the RBA, considering Australia’s heavy trade exposure to China. What’s more, the fact that iron ore prices have continued to slide since the latest RBA meeting enhances the case for a balanced tone by policymakers. Bearing these in mind, we think that AUD could gain if officials acknowledge the progress of the jobs market, but we do not expect any such reaction to be major.
AUD/USD rebounded on Friday after it hit support at 0.7375 (S3), near the upside support line taken from the low of the 9th of May. Although the rate is trading above that line, it remains below the downside resistance line drawn from the peak of the 17th of April. Therefore, we consider the short-term outlook to be flat for now. We would like to see a clear move above 0.7475 (R1) before we get confident on further upside extensions. Something like that could initially aim for our next resistance of 0.7515 (R2).
Today’s highlights:
During the European day, the UK services PMI for May is due out and the forecast is for a decline. Even though this could hurt sterling somewhat, we maintain the view that market focus is likely to remain on incoming polls as we draw closer to Election Day on Thursday.
From the US, we get the ISM non-manufacturing PMI for May and the consensus is for the index to have slid somewhat. However, such a decline would still leave the figure at a very elevated level, consistent with strong growth in the non-manufacturing sector. Therefore, we doubt that such a pullback will materially alter investors’ expectations regarding the Fed’s hiking plans from June onwards, and thus, we expect it to not hurt USD much.
Markets will remain closed in Germany, France, Switzerland, Norway and Sweden in celebration of Whit Monday.
As for the rest of the week, we have a very busy schedule that is packed with potential market-moving events. On Tuesday, the RBA will announce its rate decision as we outlined above. On Wednesday, the only event that could attract some market attention is Australia’s GDP for Q1. Meanwhile on Thursday, the UK General Election, the highly anticipated ECB policy meeting, and a testimony by former FBI Director Comey before the US Senate are all likely to keep investors on the edge of their seats. Finally on Friday, we will get China’s CPI and PPI data, as well as Canada’s employment figures, all for May.
USD/JPY
Support: 110.30 (S1), 109.70 (S2), 109.35 (S3)
Resistance: 111.25 (R1), 111.70 (R2), 112.15 (R3)
AUD/USD
Support: 0.7420 (S1), 0.7395 (S2), 0.7375 (S3)
Resistance: 0.7475 (R1), 0.7515 (R2), 0.7550 (R3)
