US Macro

Foreign Exchange investors who were looking for clarity from yesterday’s ECB policy announcement would have been disappointed as comments from Mario Draghi failed to drive the single currency beyond recent ranges. Although the EUR/USD posted a 1 week high of 1.1220 prior to the meeting, the pair gave up those gains after the press conference to settle at 1.1150 at the NY close.

And while the ECB officials didn’t say anything particularly negative about the financial conditions in the European Union, the reiteration of more possible stimulus, expansion of the current QE operations and fears over a “Brexit” vote was enough keep many traders on the sidelines.

Looking ahead to today’s US Non-Farm payroll report (NFP), there is a strong possibility that the recently settled Verizon strike could skew both the headline jobs growth number as well as the average hours worked components of the report.

The Verizon strike affected close to 40,000 workers at the Telco giant, but employment growth should still be strong enough to confirm a tightening labor market and support recent FOMC views that the FED is close to lifting the FED funds target soon.

According to a Reuter’s survey of economists, NFP likely increased by 165k in May after rising 160k in April. The jobless rate is forecast to drop by one-tenth of a point to 4.9%. The same report last week suggested that the month-long strike could slice 35,000 jobs from the headline number and without the strike employment for May would have risen to close to 200k.

The striking workers, who returned to work on Wednesday, were statistically regarded as unemployed since they did not receive a salary during the payrolls survey week.

On balance, it’s likely that as long as the hourly wages data prints in the positive .2% area and the unemployment rate is reported at 5.0% or lower, market participants will accept the report as consistent with a pick up in US growth in Q2 and support recent USD gains. In this sense, we suggest that there could be an asymmetrical response to a better-than-expected headline number.

Short AZJ.ASX

Short AZJ.ASX

AZJ

AZJ is within 5% of the target to begin shorting the stock. Increased cost of debt, 100% dividend payout ratio and limited top line revenue growth should see the stock trade from our $4.60 to $4.80 short range back to sub $4.40 in the near future. Keep this one on your radar.

 

2 June 2016 ETF Signals

ASX Listed ETF Signals

Capture

BEAR.ASX is an inverse ETF based on the ASX 200 index. We note in today’s signals, BEAR.ASX has been triggered as a new bull trend. If you’re confused on this, remember it’s “inverse”, meaning it will rise in value as the XJO 200 falls.

Short XTL.ASX

XTL.ASX

XTL

The ASX top 50 index is displaying short side momentum. Focus your efforts on the Investor Signals “BEAR Trend” within the ASX top 50 equities email service.

 

AUD/USD

The down move in the AUD/USD, which started on April 21st, doesn’t look as though it has run its course. Tuesday’s Building Approvals and Current Account data will be closely watched for a turn in the recent string of weaker data. Both sets of data are forecasted lower and it’s likely that last week’s low of .7140 will be challenged on “as expected” readings.

US Macro

The three week rally in the USD Index continued on Friday as FED chief, Janet Yellen, endorsed the notion of higher US rates in “coming months” and that growth in wages has finally caught up to the growth in the general labor market.

The shift in expectations for the resumption of the FED’s normalization of US interest rates has played an integral role in the recovery of the USD. And while a few FED officials have pointed to the UK referendum on June 23rd as a foreign threat, there have been several recent changes to open market pricing which suggest the FOMC is ready to move on rates sooner, rather than later.

As a rule of thumb, FX traders look at the short-end of the Treasury yield curve to gauge whether the trajectory of rates is suitable for a lift in the Federal Funds rate. In this respect, the implied yield of the August FED Funds futures contract has risen by 15 basis points since May 1st, while the US 2-year note yield has moved 20 basis points higher over the same period.

These data are widely published and fairly easy to follow even for novice investors. However, since the FED began its tapering operations back in October 2014, one of the most fundamental perquisites of the normalization process has been a contraction in the FED’s balance sheet.

The main open market policy tool for the FED to drain excess reserves from their balance sheet is called a Reverse Repurchase agreement, or “reverse REPO.” Since these agreements are transacted directly between the FED and FED approved commercial banks, the data can only be sourced from the Federal Reserve website and after the agreements are transacted.

As a point of reference, from October 2015 until the FED lifted the FED Funds target on December 16th, reserve balances at the Fed fell by $180 billion. Since the end of March 2016, reserve balances have fallen by over $120 billion; largely from reverse repos. And while this is not as large as the decrease that took place before the December normalization, it appears significant enough to claim that the FED does seem to be preparing for an upcoming increase in the Federal Funds target range.

As such, we suggest a long USD bias over the medium and longer term as the divergence of the US rate trajectory continues to move away from the rest of the G-7 Central Bank policies.

US Markets

Going into the three-day Memorial Day holiday in the USA, FX traders have been largely sidelined in front of today’s preliminary Q2 GDP data. This will be the first look at what could possibly be a sharp Q2 rebound and extend the recent rally in the USD Index.

Based on some of the critical components of the GDP reading released over the last few weeks, the headline print is forecast to show a .8% growth rate; Retail Sales printed higher, Durable Goods orders were at 3-year high and weekly jobless claims have been tracking at a 20-year low.

Unfortunately, due to seasonal adjustments, indexing and lags in data collection, the Associative Property of mathematics is not entirely useful in forecasting GDP data and there is a risk that a weaker report unwinds some of the recent USD gains into the long weekend.   However, we estimate the likelihood of a terrible, USD negative, GDP report is low and suggest maintaining a long USD bias into the release with the potential for the Greenback to reach new highs for the week.

Australian market finished the week…

The Australian market finished the week to Friday up 1.0% based on the S&P/ASX 200 Index. Small companies outperformed larger companies, with the Small Ordinaries Index finishing the period up 1.7%.

The best performer was the Information Technology sector, up 3.4%. Aconex Limited (ACX) led the performance rising by 14.1%.

The worst performer was the Consumer Staples sector, down 1.7% with Wesfarmers Limited (WES) and Woolworths Limited (WOW) down 3.9% and 0.8% respectively.